Two Global Tobacco Giants Discuss Merger and the E-Cigarette Market
Two international tobacco giants, Philip Morris International and Altria Group, are in talks to merge, which could reunite the world’s two largest tobacco companies after more than a decade apart.
For some time, analysts and investors have speculated that the two companies would merge because of declining cigarette sales and the need to invest in other sources of revenue, both of which have put enormous pressure on them.
Cowen analysts said cigarette sales across the industry fell 4.5% in 2018. By contrast, research firm Mordor Intelligence said the e-cigarette market was worth about $11 billion in 2018, and annual growth over the next five years is expected to exceed 8%.
In April, Philip Morris received approval from the Food and Drug Administration (FDA) to sell its heated tobacco product iQOS in the United States, which was seen as a major victory for the company, which hopes to move beyond traditional cigarettes.
Unlike combustible cigarettes, the iQOS device heats cigarette sticks wrapped in paper to produce an aerosol containing nicotine. This is different from the popular Juul e-cigarette, which vaporizes nicotine-containing liquid.
Altria, which owns a 35% stake in Juul Labs Inc., has already brought iQOS to market as part of a licensing agreement with Philip Morris.
Wells Fargo analyst Bonnie Herzog said in a client note that Juul would be an ideal partner for Philip Morris’s international expansion.
Herzog added that if Philip Morris had full control over sales and distribution, it could accelerate iQOS growth in the United States.
Philip Morris’s annual revenue is close to $30 billion, while Altria’s revenue last year was about $20 billion. Both companies said there is no guarantee a deal will be reached.
Any transaction would need approval from both companies’ boards and shareholders and could face strict regulatory scrutiny. If a merger agreement is reached, it would create a tobacco giant with a market value of more than $200 billion.
