Altria and Phillip Morris International in Merger Talks: What you Need to Know

On Tuesday, tobacco giants Altria MO and Philip Morris International PM announced discussions of a possible merger. The two companies stated that a deal has not yet been reached, but that it is possible and talks are underway. Since the announcement, shares of Altria are up 2.76% while shares of PMI are down 4.97%.

Tangled History

Eleven years ago, Altria spun off its overseas tobacco division, Philip Morris International, amid fears of U.S. litigation against tobacco groups and in hopes of increasing shareholder value. Since then, the divided companies have performed well, with MO up 109.8% and PM up 47.6%, more than the tobacco industry’s 38.2% climb in the same period.

Altria now operates in the U.S. while Philip Morris International operates in 180 countries outside of the U.S. Both companies have maintained market dominance since the split, even as the tobacco market has changed. Altria currently holds roughly 50% of the U.S. tobacco market and PMI grabs 14% of the global market. Both companies manufacture and sell cigarettes under popular brands like Marlboro.

Now, the companies are in talks to join in the same way they split, in an “all-stock, merger of equals,” PMI said. These talks are likely motivated by the two tobacco powers feeling pressure from the changing tobacco industry, as fewer people smoke cigarettes.

Potential Synergies

If the companies merge, they will likely be able to play off of each other’s strengths well to increase market control and profit. On a basic level, they will be able to combine production and distribution networks to lower costs and increase margins. This will boost the bottom line across all products and possibly increase shareholder value.

More importantly, the combined company will be able to make full use of Altria’s slew of acquisitions. In December 2018, Altria bought a 35% stake in privately held e-cigarette maker JUUL for $12.8 billion. This purchase was made to hedge the firm against the broader shift toward popular electronic nicotine products like JUUL.

Altria also in December 2018 bought a 45% stake in Canadian cannabis producer Cronos Group CRON for $1.8 billion. This purchase was made as a bet on the future of the cannabis industry, and is somewhat contingent on the legalization of cannabis in the U.S.

Both of these large purchases could magnify the benefits of a deal between Altria and PMI and make it even more enticing for shareholders. If a deal is reached, the combined company will be able to use Altria’s influence over JUUL and PMI’s international marketing and distribution network to sell JUUL products worldwide. If this kind of agreement can be reached, it will fast track JUUL’s plans of international expansion and give its revenue a large boost.

The merger could also serve to benefit Chronos by offering international growth opportunities. Canada-based Chronos already has plans to expand internationally, but a PMI and Altria merger could accelerate its overseas growth. Some 37 countries have legalized medical cannabis use in some form, of which Chronos currently operates in only four, with supply agreements to companies in two others. Chronos is in the process of building manufacturing and distribution hubs in Israel, Columbia, and Australia. When these are complete, Chronos could potentially use PMI’s network to attain extremely fast deployment.

While synergies and growth opportunities between the two companies are strong, as is to be expected from former spin-offs of the same company that operate in the same industry, individual growth estimates should be taken into account when considering a potential merger.

Altria Overview

Altria’s diversification has helped prevent its revenue estimates for the current quarter from dropping despite slowing cigarette sales. In fact, our Zacks Consensus Estimate calls for revenue to stay flat from Q3 last year. Estimated revenue growth for the fiscal year is low, at just 0.42% growth, but this number compared to U.S. tobacco sales decline is promising.

Earnings numbers are more attractive, especially compared to the industry. This quarter, estimates show 5.56% earnings growth, while next quarter’s estimates call for an 8.42% increase over Q4 2018.

Fiscal 2019 shows earnings estimates of $4.17 per share, constituting 4.51% growth. Next year is even more promising as analysts expect some of Altria’s investments to start turning more profit, and therefore call for 7.18% growth above our current-year projection.

Philip Morris International Overview

Our Zacks Consensus Estimates call for Q3 revenue to grow 2.18% from a year ago. Fourth quarter revenue is then expected to jump 3.24%, with full-year 2019 revenue projected to rise 0.95%.

Earnings for this quarter are estimated to drop by 4.86% from last year. Next quarter, earnings are projected to rise 4% over a year ago. As a result, full year earnings are expected to jump 2.16% over fiscal 2018 to $5.21 per share. Fiscal 2020 is then predicted to see another 7.9% climb in earnings over 2019.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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