Consumer Products

Why Altria and Philip Morris International Could Merge Back Together

One strategy for a company to unlock value for shareholders is to break itself up. That is what happened when Altria Group Inc. (NYSE: MO) decided to split apart the international operations from the domestic tobacco operations. Hence, Philip Morris International Inc. (NYSE: PM) was born as a separate stock.

By splitting the companies, Altria was the surviving domestic tobacco operation that was effectively free and clear (or at least quantified) of its domestic liabilities tied to tobacco suits. Philip Morris was the rest of the world’s tobacco operations.

Now the world of tobacco is finding a new change. This is the rise of the e-cigs and vaping market. In a strange twist of fate, is it possible that Altria and Philip Morris would come back together again? At least one Wall Street analyst sees the potentiality of such a recombination, a move that would combine the $123 billion market cap of Altria and the $147 billion market cap of Philip Morris.

Wells Fargo reiterated its Outperform ratings on both Philip Morris and on Altria. The difference here is that Philip Morris just became the firm’s new Top Stock Pick of that sector.

Before thinking a merger of this magnitude is just too ludicrous, investors should consider Reynolds American Inc. (NYSE: RAI), which acquired Lorillard in a $27 billion or so deal that was completed in 2015. And now there is word that British American Tobacco PLC (NYSEMKT: BTI) is considering using its $106 billion market cap to acquire Reynolds American, which itself is worth $73 billion or so. That should maybe say, “acquire the rest of Reynolds that it doesn’t already own.”

British American already owns a $5 billion stake in Reynolds, and reports from the Telegraph suggested that British American is working with investment bankers to secure financing and strategies to buy the rest of Reynolds.

A lot of things ought to be considered here. First off, would Altria use the merger as an offshoring move? Both companies have their bases in New York, but what matters is the stream of revenues and income, and where the domicile of the revenue and income takes place in the world. Philip Morris had 2015 sales of $73.9 billion and net operating earnings $6.87 billion after taxes and interest. Altria’s 2015 figures were $25.4 billion in sales and $5.77 billion in net income from continuing operations after taxes and interest. You can see where things could get complicated quickly in the domestic versus offshoring argument, even if both companies are headquartered in New York City.

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