Philip Morris and Altria want to merge

A DECADE AGO Altria, which makes Marlboros, span off its non-American business, Philip Morris International (PMI). The split was driven partly by Altria’s share price, which had been languishing below its sum-of-parts value, but also by regulatory hounding of Big Tobacco over its role in causing cancer. When British American Tobacco made a bid for Reynolds American, maker of Camels, in 2016, Bonnie Herzog, an analyst at Wells Fargo, a bank, urged PMI to reunite with its former parent. It took longer than expected. But on August 27th the two said they were in talks to merge. Their combined market value just before the announcement was $210bn.

Ms Herzog still thinks the merger makes sense, given the benefits of scale and geographical reach in what she calls the “global arms race” for “reduced-risk” products, which use fewer harmful chemicals. Last year Altria spent $12.8bn on 35% of Juul Labs, a maker of popular high-nicotine vaporisers. It paid $1.8bn for 45% of Cronos Group, a cannabis company from Canada (which, along with some American states, has legalised pot). PMI has spent $6bn since 2008 to develop IQOS, a smoke-free device which heats tobacco and is expected to represent 40% of its sales by 2025, up from 14% last year. In April it won approval from the Food and Drug Administration (FDA) to sell IQOS in America, starting next month (under an existing licensing agreement with Altria).

Worldwide cigarette sales fell by 4.5% in 2018, to $714bn, and may continue to decline. The FDA’s proposed rules on nicotine content, to make smokes “minimally addictive”, could cut profits of American tobacco firms by half, say analysts at Morgan Stanley, a bank. By contrast, e-cigarette revenues may grow by more than 8% annually over the next five years, from $11bn today, according to Mordor Intelligence, a research firm.

For all that, merging with Altria may expose PMI to regulatory risks from Juul, whose controversial devices are a worrying hit with teenagers. Altria could also be a drag on PMI’s profitability, which has exceeded its parent’s since the split. PMI’s share price fell by 7.8% on the news. The deal may yet go up in smoke.■