Reuters Insider - Trading at Noon: Philip Morris and Altria talk about creating a $200 billion company

Philip Morris CR as

28/08/2019 06:24

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Source: Reuters Insider

Description: Philip Morris and Altria are discussing joining forces again. We
look at the reasons for the talks. Plus, Smucker sinks after results.
Short Link: https://tmsnrt.rs/2ZzN2Mo

Video Transcript:

Welcome to Trading at Noon. I am Leah Duncan. First, Viacom and CBS remerged.
Now Philip Morris International and Altria are talking about joining forces
again. The tobacco giants are discussing an all-stock merger that would create
a company with a market value of more than $200 billion. Shares of Philip
Morris losing 5% today. Shares were down about 10% earlier in the trading
session. Altria stock is down 2%. They were originally moving higher. Reuters
Corporate Finance and Deals Editor, Greg Roumeliotis. He is with me today to
dissect this potential deal. Greg, great to have you on the show. What do you
make of the stock reaction? 

Well, I think people are not that excited. It has just been reported that
Philip Morris will not pay a premium, basically, for Altria so that helped its
shares recover a little a bit, but they're still down. So people are trying to
figure out what the rationale for the deal is. There are not many synergies
between the two companies, because they operate geographically in different
markets. And when it comes to E-cigarette, which is a focus for both
companies, one can argue that Altria and Juul, in which it has an investment
in big E-cigarette company, would benefit from Philip Morris' international
distribution network in big markets, such as India. But people overall are
excited about it. It just feels like two melting ice cubes melting because
fewer people smoke, getting together, and the resulting big ice cube will take
longer to melt but it's hard to get people that excited about it. 

So less people smoking, Greg. Actually, according Cowen - they put out some
numbers there - number of cigarettes sold continues to fall down almost 5% on
an adjusted basis in 2018. Less people smoking- also more competition from the
likes of E-cigarette companies as well.

Which is a game like these guys are trying basically to get into. But this is
like more like pain relief rather than huge growth story, yet it has big
potential. But as you have seen, like, big regulatory risks. You've seen the
headline about increasing concerns among the academic community in the media
about the health risks of vaping and E-cigarettes. So these guys are trying to
create a growth story somewhere. But they're facing serious challenges. And
it's not clear what that merger will do for them in that regard. 

Now is there any sense of who might stand to benefit more out of this merger,
if they do actually merge? 

Well, obviously maybe a little bit better for the target. So just based on
share reaction as well. Like Altria, which is focused primarily in the United
States, may benefit a little bit more. But otherwise, we'd have like a big
consolidation in the market. Regulators may allow this deal to happen from an
antitrust perspective just because there's not much overlap in the markets- 

Or it might not. They might say, what, it's too big of a deal. 

It is, particularly given that there will be like so many markets, so many
regulatory bodies that would have to approve this deal. This would be the
biggest tobacco deal of all time- bigger than British American deal with kind
of like for Reynolds- sorry British Imperial Tobacco deal for Reynolds. Bigger
even the biggest consumer deal ever. Bigger than ABI- AB InBev-SABMiller. So
big numbers, but big benefits? We'll have to see. 
And then it might also - given the scale of the deal where these businesses
operate here in the United States, throughout Europe, et cetera, and the world
- it might actually take up quite a bit of time for a deal to happen, to
actually finalize. 

Actually, even if regulators do allow the deal to happen, you're probably
looking at protracted regulatory periods. It'd be interesting to see when the
companies- if they get to the finish line and they announced the deal, how
much time they will allow for it? One year, two years- it wouldn't be
surprising if it's that long. 

Now you talked about that big stake that Altria has in E-cigarette company,
Juul. What would this merger, I guess, with Philip Morris mean for that? 

Well, so far, Juul has basically seen Altria as strategic investors and has
resisted selling. The question will be if Philip Morris and Altria merge, does
this change Altria's appeal for Juul? The partnership they already have- does
that kind of like extend? Would they be willing at that stage to consider a
sale of the entirety of Juul? Juul just did another equity and debt financing
of small size this month. It could be that it rekindles the relationship with
Juul. But again, there's like deep uncertainties with regards to the
E-cigarette market and the regulatory prospects there, which a combined
company now, if that deal happens, would have to navigate. 

What about- there's also IQOS, that is the cigarette alternative product that
I believe Philip Morris and Altria they've partnered on which supposedly heats
tobacco but doesn't burn it. What about that? 

Yeah, so- I mean, they're- basically, that's something else the companies have
been trying. So again, that is another reason to ask, well, in E-cigarettes-
the companies are trying different things. Is there really any synergies and
rationale? The main benefit people can see is you take Juul international
using Philip Morris' platform. But so far, as we have seen, like Philip
Morris- try to remember, is it one of the worst performing stocks? We can look
at the numbers, but they haven't been doing great. So IQOS hasn't been a big
solution for them. There is little reason to think that a merger would reverse
that. 

And before we let you go, Greg, what are the analysts saying about this? 

Well, the analysts are trying to figure it out. The analysts are focusing a
lot on E-cigarettes, discussing some of the rationale. We're also grappling
with until we get more details from the companies. It would be the tobacco
industry's last big merger thing for a while if this happens. The question is-
can these companies get investors excited with a growth story or is it just a
case of saying, "Yeah, just stuff out there is going to continue to be tough.
We're just better off together than we are apart"? 

Alright, we'll leave it there for a now. Greg Roumeliotis, he is our Reuters
Corporate Finance and Deals Editor. Alright, let's move on and check out the
markets. Stocks are treading water today. Chinese industrial companies return
to profit in the month of July while US consumer confidence fell less than
predicted, and home price growth slowed to its weakest level in almost seven
years. The NASDAQ Composite is down just 0.1%, with energy stocks the weakest
performers there. The Dow and the S&P 500 are roughly flat. Now Dow component
Johnson & Johnson is rising 2%, despite a judge ordering it to pay almost $600
million for its part in fueling the opioid epidemic. And that was less than
some analysts feared, though there are many, many more cases to come. And food
for thought in our stocks to watch today, we begin with Smucker's. The company
missed quarterly revenue and profit forecast and cut its full-year outlook. It
blamed lower prices for coffee and peanut butter among other reasons. Shares
are sliding 8% today. Also, we're watching Papa John's Pizza which appointed
former Arby's President Rob Lynch as its new CEO, effective immediately. That
stock is jumping 7%. And we end on Red Robin Gourmet Burgers. BofA Merrill cut
its rating on the stock to 'underperform' from 'neutral' as it thinks the
chain's earnings growth will come in much lower than expectations in 2020. The
broker says Red Robin's below industry margins are a challenged in a tight
labor market and the company will find it tough to keep up with rapid
technology and innovation changes because it lacks the size of competitors.
Shares are dropping 6% today. And that does it for Trading at Noon on this
Tuesday. I'm Leah Duncan, and this is Reuters