What Is the Market Smoking?
We think a PMI-Altria merger makes a lot of strategic sense.
We do not understand the market's negative reaction to the news that Philip Morris International (PM) and Altria (MO) are in talks regarding a potential all-stock merger of equals. The decline in the market value of PMI is particularly surprising, given the absence of a valuation premium. It has been our long-held view that this combination would occur, primarily to align the interests of both parties in the distribution of iQOS in the United States, but also because of the potential for cost synergies, the ability to manage the world's largest cigarette, heated tobacco, and vaping brands under one roof, and for PMI, the natural foreign-exchange hedge that U.S. distribution will bring. We reiterate our fair value estimates for both companies and think the sell-off creates an attractive entry point to an already undervalued group.
The combination of PMI and Altria would be a reversal of the decision to separate 11 years ago. In some ways, that strategy has become redundant: The class-action litigation risk that Altria was trying to isolate within the U.S. entity has eased, while value was arguably not created by separating the international business. PMI traded at around 15 times forward earnings before this announcement, and Altria at 11 times--the same multiples they were valued at after the split in 2008. In the 11 years since, however, the market has changed significantly. The advent of cigarette substitutes has driven the decline rate of cigarette volume higher, from around 3% a decade ago to 5% now, and prompted a race among manufacturers to build portfolios of new products across multiple categories. Regulatory risk has grown, with more-assertive regulators clamping down on marketing in both cigarettes and emerging categories. Higher risk and accelerating volume declines may explain investors' negative reaction to the talks.
Philip Gorham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.