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Philip Morris Ends Merger Talks With Altria, Removing Some Uncertainty

This morning Philip Morris (PM) announced that merger discussions with Altria had ended without a deal.

Investors responded positively to the news, lifting PM's stock price by about 5% in early trading.

As we discussed earlier this month, shareholders were concerned that a merger would increase Philip Morris's risk profile by exposing the company to a more dynamic and challenging business environment in America, where cigarette volumes are declining at a faster rate.

The firm's U.S. exposure would have increased from 0% to nearly 40% of net revenues, and Philip Morris would be roped into the latest regulatory drama with Juul (Altria owns a 35% stake in the controversial vaping company).

Instead of combining, the companies will focus on working together to make Philip Morris's heat-not-burn tobacco product IQOS a success in the U.S., where it gained regulatory approval in late April. Altria has an exclusive licensing agreement to sell IQOS in the U.S.

“After much deliberation, the companies have agreed to focus on launching IQOS in the U.S. as part of their mutual interest to achieve a smoke-free future.” – Philip Morris CEO André Calantzopoulos

IQOS's U.S. prospects have possibly brightened following the vaping industry's recent backlash.

Heat-not-burn tobacco products compete with e-cigarettes as cigarette alternatives, so the Trump administration's plans to ban flavored vaping products could at least temporarily boost IQOS's appeal by removing the leading category in the smoke-free market.

In its press release today, Philip Morris reassured investors that IQOS does not share the controversial qualities (rampant use by teens, poor regulatory oversight, etc.) that have tripped up the vaping industry. 

Here are some excerpts: 

  • IQOS is not an e-vapor product.
  • Global data, based on four years of use, show that IQOS is not significantly appealing to youth or to nonsmokers.
  • IQOS is the only heated tobacco product with premarket authorization from the U.S. FDA, which followed the Agency’s rigorous science-based review, leading it to determine that authorizing the product for sale in the U.S. is appropriate for the protection of the public health.

It's hard to say whether or not IQOS will catch on in the U.S. to eventually become a material contributor to Philip Morris's business, but the company's long-term outlook doesn't hinge on IQOS's U.S. success.

The firm's leading technology investments (smoke-free products expected to reach 40% of net revenue by 2025, up from 0.2% in 2015 and nearly 20% last quarter), geographic diversification (more than 70% of its total volume is derived in emerging markets), and lack of exposure to the dynamic U.S. market seem likely to keep Philip Morris on steady ground as the global tobacco market continues evolving.

Overall, it's back to business as usual for Philip Morris, and the company's Safe Dividend Safety Score remains unchanged.

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