Investors wiped $13 billion (€11.7 billion) off the combined market value of Altria and Philip Morris International (PMI) on Tuesday after the revelation of merger talks, threatening to derail the recombination of the two tobacco giants.
PMI investors are worried about US regulatory and litigation issues, which were the main reason the two companies split more than a decade ago, according to analysts and people familiar with investor feedback to the companies.
Altria investors are upset that the contemplated deal does not pay them a premium for their shares, they said.
Value
The combined group would have a market value of about $200 billion. Both companies are listed on the New York Stock Exchange but PMI sells Marlboro and other brands outside the country while Altria sells inside the US.
A deal would require shareholder approval at both companies.
PMI said on Tuesday it was discussing an all-stock merger with Altria but “no assurance” could be made that an agreement would ultimately be clinched. According to one person briefed on the potential deal structure, PMI shareholders are likely to own between 57 per cent and 59 per cent of the combined group. Altria stockholders would hold the remainder.
“The potential to reunite the companies has been often discussed, but we did not believe this would occur given the heavy regulatory burden in the US market and its weakening growth profile,” said Christopher Growe, an analyst at Stifel.
Callum Elliott, an analyst with Bernstein Research, said there were "significant risks" for PMI shareholders and that the combined group was unlikely to trade at the same premium PMI previously enjoyed.
PMI shares suffered their largest one-day drop in 16 months on Tuesday, declining 7.8 per cent to $71.70. The slide was so intense at one point during the trading day that a US securities rule restricting short sales of PMI stock went into effect.
Altria shares also slid after initially rallying as much as 11.3 per cent, ending the day 4 per cent lower at $45.25.
A deal two years ago in which British American Tobacco bought Reynolds American for $49.4 billion sparked expectations of further consolidation in the industry. The market has changed dramatically in recent years, as cigarette sales shrink and consumers shift to vaping and e-cigarettes.
One sticking point is Altria’s 35 per cent stake in Juul, the popular e-cigarette company. As part of its agreement with Juul, which last year was valued at about $38 billion, Altria agreed not to distribute any other e-vapour products. PMI owns IQOS, a cigarette-like device that heats, rather than burns, tobacco. It is marketed as an alternative to cigarettes but it is unclear whether Juul would consider it an alternative or direct rival to vaping.
Portfolio
Some analysts said that it would make little sense for PMI to pay Altria shareholders a premium since the international maker of Marlboro is widely seen as having a stronger portfolio of brands.
"We struggle to see why PMI would want to pay a big premium, because PMI owns the strongest portfolio of NextGen products and [ Altria ] does not directly own any," said Adam Spielman, analyst at Citigroup. "But stranger things have happened before."
The two companies are investing in e-cigarettes despite intense opposition from regulators in Washington, which have warned that teenage vaping has become an “epidemic”. According to one federally funded study last year, one in five high school seniors said they had vaped nicotine in the previous month.
“While US litigation risk was sufficient to break these companies apart back in 2008, US regulatory risk is on the same plane, in our view,” analysts at Stifel said. – Copyright The Financial Times Limited 2019