Philip Morris Coughs Up for U.S. Re-Entry

Fourteen years after it was separated from Altria,

Philip Morris International PM 1.85%

wants to return to the U.S. market — this time in a smoke-free business.

The tobacco giant, which distributes Marlboro cigarettes outside of the US, has made an all-cash offer of $16 billion to Swiss Match, a Stockholm-based company that makes bags oral nicotine for Zyn. The price is 39% higher than where the target’s stock was trading before the WSJ reported Monday that the two companies were in merger talks.

A deal would bring PMI an additional $2 billion in annual revenue and increase the share of net sales from non-combustible products such as heated tobacco sticks and oral nicotine bags from 29% in 2021 to around 36% in 2022 based on FactSet estimates. Management wants to increase this share to over 50% by mid-decade and has spent $9 billion developing its own smokeless products internally. The change could make the stock more attractive to investors wary of tobacco names that still rely heavily on sales of combustible cigarettes.

Including Swiss Match’s net debt and dividend payments, PMI will pay a total price of $17.5 billion, multiple of 18.4 times the target’s estimated earnings before interest, taxes, depreciation and amortization for 2022, or about 17 times the estimate for 2023, according to analyst consensus compiled by FactSet. This number is very high based on major deals in the tobacco industry over the past two decades. In 2017, British American Tobacco paid just 11.7 times as much for Reynolds American, Bernstein noted.

It’s especially expensive considering PMI only really wants part of the business. Swiss Match generates about 75% of its Ebitda from smokeless products and the rest from cigars and lighters. Even putting the cigars and lighters business in the same multiples of the Reynolds American deal — generous considering its cigar brands face tighter regulations in the US — means that the industry smoke-free business rated 20 times higher.

Yes, this business division of Match Sweden is growing rapidly, increasing sales by 16% in the first quarter of 2021 compared to the same period a year ago. And there is an opportunity to launch Zyn in new markets, especially in some European countries, where the brand has a more limited amount of distribution than in the US.

More important for PMI is its footprint in the US – the world’s most valuable smokeless tobacco market and currently dominated by rivals BAT and e-cigarette brand JUUL Labs, owned by Altria. The immediate purchase of Match Sweden will make PMI the number one player in the trendy oral nicotine bag space, with a 64% share in the US market ahead of an 18% and 11% stake in Altria and BAT.

PMI will have two factories in the US, one in Kentucky and one in Alabama, and a distribution network connected to 150,000 points of sale such as convenience stores and gas stations. This infrastructure will be valuable as PMI rolls out its own vapor and heated tobacco products in the US market in the coming years. Altria currently has a license to distribute IQOS in the US, but the offer for Match Sweden is the latest sign that PMI wants to get out of the deal and go it alone. Shares of Altria are down nearly 10th since news of merger talks emerged.

At least the likelihood of objections, from another major tobacco company, seems low. BAT and Altria will face antitrust issues, while Japan Tobacco may be too distracted by its exposure to Russia to consider an expensive deal. Analysts at Cowen‘S

The event management team notes that the target share price puts the current offering completion rate at around 93%. The Sweden vs PMI match looks like a match.

Write letter for Carol Ryan at

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