Marlboro Man is stubbing it out. Philip Morris International, which sells the brand outside the US, wants to accelerate its move away from cigarettes. The Connecticut-based company has its sights on Swedish Match, America’s biggest supplier of chewing tobacco. After the Stockholm-based company confirmed it was in talks with the tobacco giant, the shares jumped 25 per cent on Tuesday to the $16bn valuation mooted in press reports.
The appeal for Philip Morris is clear. It wants half of sales to come from smoke-free products by 2025 from about one-third today. Swedish Match’s number one US positions in chewing tobacco and nicotine pouches make it a tidy addition to an existing heated tobacco business.
Sales of Swedish Match’s smoke-free categories, judged a lower risk to health by US regulators, have grown by more than half over the past four years. Its success in the US is down to its fast-growing Zyn brand nicotine pouches. The rest of the portfolio is less exciting. Like other traditional tobacco products, chewing tobacco volumes are in slow decline and snuff is stagnating. The company also has a cigar brand which it unsuccessfully tried to spin off at the end of last year.
Swedish Match’s growth is reflected in some of the best total shareholder returns in the sector, 61 per cent over the past three years in dollar terms. That is better than the 40 per cent Philip Morris achieved. Even so, a limited exposure to contentious vaping has helped Philip Morris outperform slightly.
The mooted valuation is a one-quarter premium to the undisturbed price. That seems light by recent standards. But making the deal work financially will require hard work.
The limited cost savings from a combination leave little room for a counter offer. Fully covering the mooted premium would take cuts of $300mn annually, equal to an ambitious 15 per cent of Swedish Match’s sales last year. Annual savings of 2.5 per cent of sales are more realistic, think analysts at Citi. Earnings might then grow by just 3.2 per cent from a deal.
An offer, then, is something that Swedish Match shareholders should chew over seriously.
