Disagreement over Juul Labs Inc.'s future and the increased regulatory fire raining down on the U.S. vaping market likely spiked a possible merger between Philip Morris International Inc. and Altria Group Inc., analysts said.
The tobacco giants ended their merger talks Sept. 25, less than a month after confirming the discussions on Aug. 27. The talks likely hinged on how Juul would mesh with a combined Philip Morris and Altria, which holds a 35% stake in Juul, as the e-cigarette industry faces heightened scrutiny for a rise in youth vaping, analysts said. While a deal is off, for now, experts still speculate that Philip Morris and Altria could merge after splitting their businesses in 2008 given increased consolidation in the industry and declining sales of traditional cigarettes.
"Although the talks have ended and the companies are choosing to pursue another path, we got the sense that talks could potentially resume in the future when the U.S. environment becomes more stable — in other words, never say never," Bonnie Herzog, a Wells Fargo analyst, said of a Philip Morris and Altria merger in a Sept. 25 note following discussions with management at Philip Morris and Altria.
Altria's stake in Juul was a key consideration for the deal talks, as Philip Morris could boost distribution of Juul products internationally, Herzog said. Altria sells Marlboro cigarettes in the U.S., while Philip Morris distributes the same brand internationally and both companies dabble in smoke-free offerings.
Philip Morris could still consider a potential commercial arrangement at some point with Juul, which seemingly was not involved in the merger talks, Herzog said.
While the valuation of a merger may have also contributed to the companies calling off the talks, "the underlying reason is likely to have been an inability to align on a convincing vision of the medium-term future of vaping both in the U.S. and globally — in particular in light of extreme scrutiny on the JUUL brand," Shane MacGuill, senior industry manager at Euromonitor International, said in an email.
Some investors have also argued that the merger talks stalled because Philip Morris may have wanted control of Juul to gain more exposure to e-cigarettes, Jefferies analyst Owen Bennett said in a Sept. 25 note. That could hedge against any possible slowdown of Philip Morris' heated tobacco device, Bennett said.
Philip Morris sells IQOS, which heats solid tobacco plugs to produce flavored vapor, while most e-cigarettes vaporize a nicotine-infused liquid.
Philip Morris' IQOS heats a tobacco plug without burning it to produce flavored vapor. Source: Philip Morris International Inc. |
A spokesman for Philip Morris declined to comment further about the merger talks, while Altria and Juul did not respond to requests for comment.
Juul is facing investigations on multiple fronts over its alleged role in a dramatic rise in youth vaping as broader scrutiny of all e-cigarette products has grown in response to deaths and injuries linked to vaping.
Altria executive K.C. Crosthwaite is replacing Juul CEO Kevin Burns, the companies announced Sept. 25. Juul will also end U.S. advertising and stop lobbying the Trump administration as officials weigh a ban on all e-cigarettes other than those with a tobacco flavor.
In a Sept. 25 statement on the end of merger talks, Philip Morris stressed that its IQOS device is different from e-cigarettes and does not "significantly" appeal to youth or to nonsmokers.
The U.S. Food and Drug Administration this year granted Philip Morris permission to sell IQOS through a premarket approval process that regulators will soon require for all e-cigarette makers.
Altria will sell IQOS in the U.S. and pay royalties to Philip Morris for the device, while analysts said the deal stands to benefit both companies.
"IQOS is in a better position in the U.S. today given the regulatory threats against e-cigs," Herzog said.
Markets took a mixed view of the end of a merger.
Shares of Philip Morris closed up 5.2% on Sept. 25 to $75.28, while Altria shares closed 0.4% lower at $40.56. Altria's stock dropped nearly 10% following the initial news of merger talks Aug. 27 through Sept. 24, while Philip Morris shares fell 0.2% during the same period, according to S&P Global Market Intelligence data.

