Published: Fri, August 30, 2019
Markets | By Otis Pena

After decade apart, Philip Morris and Altria may become 1

After decade apart, Philip Morris and Altria may become 1

The American tobacco companies Altria Group and Philip Morris International are discussing a merger.

Earlier this year Altria executives estimated annual USA cigarette volumes would decline between 4% and 6% through 2023, sending company shares down sharply. Altria, which operates in the United States and still sells Marlboro in the country, acquired a 35 per cent stake in vaping company Juul Labs Inc past year for US$12.8 billion.

Over the past year the e-cigarette category has grown 97% to $1.96bn and, according to Wells Fargo, Juul's sales grew 783% between June 2018 and June this year, reaching $942.6m. Meanwhile, the e-cigarette market, worth about $11 billion in 2018, is expected to grow at more than 8 percent annually over the next five years, according to Mordor Intelligence. The company offers IQOS smoke-free products, including heated tobacco and nicotine-containing vapor products under the HEETS, HEETS Marlboro, and HEETS FROM MARLBORO brands, as well as the Marlboro HeatSticks and Parliament HeatSticks brands.

A major tobacco merger could be on the horizon. Finally, Barclays raised Philip Morris International from an "equal weight" rating to an "overweight" rating and lifted their price target for the company from $82.00 to $100.00 in a research note on Friday, July 19th.

Bernstein analyst Elliott said the details of a December agreement between Juul and Altria could complicate things.

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In April, Philip Morris won approval from the US Food and Drug Administration to sell iQOS in the United States.

She added that she's "simply not buying" Philip Morris' claims that the company is focusing on helping the community by switching from cigarettes to vaping. While U.S. regulators have allowed the sale of the device, they have not yet ruled on whether iQOS can be marketed as less harmful than cigarettes. They are different from e-cigarettes such as the popular Juul device, which vaporizes a nicotine-filled liquid.

If successful, the merger would reunite the two arms of one of the tobacco industry's oldest and biggest brands.

In 2008, Altria spun off the Philip Morris International unit in a move aimed at unlocking the value of the fast-growing unit. His firm oversees $15 billion in assets but sold out of Philip Morris late previous year.

Analyst Bonnie Herzog said that while they have not heard any specific update to explain the stock movement, the company believes it is connected with renewed speculations about a Philip Morris-Altria combination - a position Altria first made in 2016. While no one from Wall Street could say what really happened, rumors circulated that a sell-off was sparked by reports about the two companies joining forces. RBC Capital Markets analyst Nik Modi saw several strategic reasons for a deal, including geographic alignment with worldwide competitors and full economic benefit of IQOS in the United States and global access for Juul. Since the product's launch, the portion of high school students using e-cigarettes has mushroomed to 20%, according to USA survey figures released past year.

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