May 18, 2022
Reinvention tops returns in Philip Morris snus bet

LONDON, May 11 (Reuters Breakingviews) – Jacek Olczak is spending big to ditch the smokes. The Philip Morris International (PM.N) chief executive has agreed a $16 billion takeover of nicotine pouch maker Swedish Match (SWMA.ST). The deal brings the Marlboro maker closer to being mostly smoke-free by 2025. But making a financial return could take much longer.

PMI plans to make more than half of its net revenues from products like tobacco heating device Iqos and vaping product Veev within three years read more . Swedish Match, which makes the bulk of its sales from products like Zyn nicotine pouches and chewing tobacco, considered to carry a much lower risk to health than smoking, will help.

Crucially, it also brings PMI back to the United States. The $153 billion group distributes tobacco products there through Altria, from which it was spun off in 2008. Swedish Match, which has a two-thirds nicotine pouch market share in the United States and makes almost 60% of its smoke-free revenue there, would give PMI a distribution network to sell stuff like Veev vapes.

A premium of almost 40% is pricey, though. The deal values Swedish Match at $17.5 billion, including net debt. To make back the Swedish group’s cost of capital of around 7% – a low threshold compared to the broader tobacco industry – would require around $1.6 billion of annual operating profit before tax. To hit that number by 2027, a long wait, PMI would need to grow the Swedish group’s EBIT by 10% a year and take out costs equivalent to 10% of 2021 revenue, according to Breakingviews calculations. That looks tough: analysts are expecting sales to rise on average by 7% over the next three years, according to Refinitiv data.

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PMI is doing the right thing by diversifying the types of products it offers. Yet moving into new areas yet untested in some markets brings risks. PMI learnt that the hard way recently, when it and Altria lost a patent infringement case for Iqos tobacco heating devices. And regulators too might one day look less kindly on snus nicotine pouches, as the United States has on flavoured vapes, for example. The price Olczak is paying leaves little room for snafus.

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  • Philip Morris International said on May 11 it has offered to buy Swedish Match for 106 Swedish crowns ($11) per share in cash, valuing the Scandinavian snus maker’s equity at $16 billion.

  • The offer, which has been approved by Swedish Match’s board, represents a 39% premium compared to the closing price on May 9.

  • The combined company would have debt equivalent to approximately 3 times adjusted EBITDA at closing, PMI said, adding that it would suspend its current three-year share repurchase programme, which began in July 2021.

  • Swedish Match shares rose 9% at 0729 GMT to 104 Swedish crowns.

– PMI shares closed broadly flat on May 10 compared to May 6, the last U.S. market close before the Wall Street Journal published news that a deal was imminent.

Editing by Neil Unmack, Streisand Neto and Oliver Taslic

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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