Philip Morris and Altria in Talks to Merge in Bid for Vaping Market

Philip Morris and Altria in Talks to Merge in Bid for Vaping Market

Two of the world’s largest tobacco companies, Philip Morris International and the Altria Group, are discussing a merger that would reunite them after more than a decade in a deal aimed at domination of the fast-growing electronic-cigarette market.

Analysts and investors have long speculated that the companies would merge, given mounting pressure from declining cigarette sales and the need to invest in other sources of revenue.

The companies issued a statement disclosing the talks on Tuesday, which they described as an “all-stock, merger of equals.” A merger would create a company with a market value of more than $200 billion.

Industrywide cigarette sales volumes tumbled 4.5 percent on an adjusted basis in 2018, according to analysts at Cowen. In contrast, the e-cigarette market was worth about $11 billion in 2018 and is expected to grow at more than 8 percent annually over the next five years, according to the research firm Mordor Intelligence.

In April, Philip Morris won approval from the Food and Drug Administration to sell a heated tobacco product called iQOS in the United States, a big win for a company looking to move beyond traditional cigarettes.

“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 U.S. market and its weakening growth profile,” said Christopher Growe, an analyst at Stifel.

Unlike combustible cigarettes, iQOS devices heat tobacco-filled sticks wrapped in paper, generating an aerosol that contains nicotine. They are different from e-cigarettes such as the popular Juul device, which vaporizes a nicotine-filled liquid.

Altria, which owns a 35 percent stake in Juul Labs, already markets iQOS as part of a licensing agreement with Philip Morris.

Juul would have an ideal partner for its international expansion in Philip Morris, Bonnie Herzog, a Wells Fargo analyst, said a note to clients on Monday. She added that Philip Morris could speed up the growth of iQOS in the United States if it had full control over sales and distribution.

Philip Morris has annual revenue of nearly $30 billion, while Altria generated about $20 billion last year. Both companies said there could be no assurance a deal would be reached.

Any deal would need to be approved by the companies’ respective boards and shareholders, and would probably face stiff regulatory approval.

“The regulatory environment in the U.S. has been volatile and more burdensome for tobacco companies over the past five years, and it is clear that the F.D.A. has combustible cigarettes in its cross hairs,” said Mr. Growe of Stifel.

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