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Will Philip Morris Acquire Altria?

Mar. 07, 2018 3:03 PM ETAltria Group, Inc. (MO), PM104 Comments
Aristofanis Papadatos profile picture
Aristofanis Papadatos


  • There have been rumors from time to time that Philip Morris may merge with Altria.
  • This is somewhat surprising, as the two companies separated just a decade ago.
  • However, the reasons behind the initial spin-off are not valid any more.

There have been rumors from time to time that Philip Morris (NYSE:PM) may merge with Altria (NYSE:MO). Wells Fargo has assigned a 70% probability to the merger while Altria was the most mentioned stock in a Bloomberg M&A survey. The two companies separated a decade ago so it should be somewhat surprising, at least on the surface, to hear rumors that the two tobacco giants will reverse their strategy. Nevertheless, as the business conditions have changed in the tobacco industry during the last decade, in this article I will analyze whether Philip Morris is likely to recombine with Altria.

First of all, the main objective behind the split of the two companies was the diversification of the litigation risk. More precisely, the spin-off of the international company made it harder and less profitable to sue the company. Nevertheless, while the litigation risk was elevated a decade ago, it seems to have decreased nowadays.

The other objective behind the initial split of the companies was to enhance shareholder value. The domestic company, Altria, was growing slowly whereas the international segment, Philip Morris, was viewed as a high-growth stock. Therefore, the release of the high-growth segment was supposed to lead the market to fully appreciate it and thus expand its P/E ratio. While the plan was reasonable, things turned out quite differently. More precisely, during the last decade, Altria has essentially doubled its earnings per share whereas Philip Morris has grown them by just 15%. Consequently, Altria has pronouncedly outperformed Philip Morris during the last decade (182% vs. 111%, excluding dividends). In addition, Philip Morris is now trading at a trailing P/E=22.8 so there is not much room for further P/E expansion. Therefore, this factor, which was critical in the split of the two companies, does not seem to have merit any more.

This article was written by

Aristofanis Papadatos profile picture
I am a chemical engineer with a MS in Food Technology and Economics. I am also the author of 2 mathematics books ("Arithmetic calculations without a calculator" and "Word Problems") and perform almost all the calculations in my mind, without a calculator, making it easier to make immediate investing decisions among many alternatives. I invest applying fundamental and technical analysis and mainly use options as a tool for both investing and trading. I have nearly achieved my goal of early retirement, at the age of 45. In my spare time, I follow Warren Buffett's principle: "Some men read playboy. I read financial statements".

Analyst’s Disclosure: I am/we are long PM, MO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am long PM, MO via short positions in put options.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (104)

Does anyone else see the massive head and shoulder pattern in MO formed over the last two years. We are right on the neckline!
IZZKUBE2.5 profile picture
@Garrett M
Good observation...so what's next...a breakout 'up' or a 'reversal'?
Discerning yes. Unfortunately I love this stock to much even if it does break down.
arthur_bishop1972 profile picture
I see it, and I know ex-div day is this Wed (3.14.18), so maybe we get a move down, MAYBE.

I decided to wait to buy more (unless it magically takes a dive tomorrow), as I'd like a price under $64 and I have a good size position already. I'm betting that I can add @ at least .70 cents lower sometime after the ex-div day too.
allday1234 profile picture
There will always be many answers to questions and discussions expressed by others that may not fit the answers we are looking for. We can interpret the answers to reflect any meaning and the CEO just indicated that a re-merger after the original split was apparently not an option. ( at least at the particular time ) I am not in the decision process and any merger because of my rights as a stockholder would require a vote, although my vote would be a yes it in effect would be overshadowed by the many millions of other votes. It would bring the US version of PMI again under one corporate entity and with the new technology that PMI is developing easier to integrate once approved for the US ( my view )
The re-merger is currently not an option and I am comfortable with things remaining the way it is. Should that option become available I would vote yes.

mo_strategist profile picture
To the point, I don't recall PM management making any explicit statements about this. Although common sense would suggest that if PM had issued a firm denial, the rumor "should" be dead, in reality people believe a lot of things that don't stand up to close examination.

I do know that on its own merits a PM/MO re-merger makes no sense now. And yes, I do believe that whether PM management actually did or didn't make this point publicly, the reported comment on this ("we just split, there is no reason to reunite now") is probably a pretty accurate reflection of what management actually believes.

With respect to responding to questions on same, there are many ways a CEO could do so. As indicated in my response, I wouldn't expect him to LITERALLY use the words "no comment." He'd be more tactful, but the point is the answer would be a non-answer that didn't explicitly confirm or refute the premise.
allday1234 profile picture
Well you can disagree and that's OK ..Having been involved during my working years with "inside information" I can tell you that all people answer it differently. Since the specific question about a merger was asked ( I do not know ) and how it was phrased it could have been answered in several ways and it is easier to say none leaving the question closed than to say "No Comment " and leaving the question to a wild speculation as being a question that has been discussed. ( We currently know that the RUMORS that exist still discuss it and it is easy to put a close to such rumors by issuing his statement. A "NO COMMENT" continues to allow the RUMOR to persist. ) While the rumor has been around for quite sometime fueled by the interests of (some analysts) I am sure that in some circles the rumor was put to rest as a non-issue. If you believe that ( and based upon your statement you do believe it ) the CEO or any board member who is asked a specific question would discuss with you a direct answer that would directly affect a particular stock, it is entirely your belief.

Using your comment
If it *WERE* happening, his answer to the question would be along the lines of "no comment".

If the CEO or any BOD member wanted to shut down the (RUMOR MILL) or at least lessen the speculation surrounding the issue of a merger his NO COMMENT statement would only strengthen the speculation that such a merger had been discussed. ( whether it was or was not )
In this case, if PMI were in negotiations on a merger with MO, and the CEO states publicly that this is NOT happening, he's putting out deliberately false information, and THAT is actionable in civil court. So he can't really do that. ( that is a belief only held by the individual seeking such information )

As an insider with insider information he is not at liberty to disclose such information that would deliberately influence the price of the stock and all information would have to be disclosed to everyone at the same time. He was referring to a RUMOR and not to a fact that had been disclosed...Any so-called actionable information from a civil court does not exist. But you can believe what you want and I do not intend to argue what was said or not said.

It is not possible to define all categories of material information. However, information should be regarded as material if there is a reasonable likelihood that it would be considered important to an investor in making a decision to buy, hold or sell a security.

Examples of such information include:

Financial results;
Projections of future earnings or losses;
News of a pending or proposed merger or acquisition;
Gain or loss of a substantial customer or supplier;
Changes in a dividend policy;
Major changes in senior management;
The list can go on and on based solely on the requirements of the particular company

mo_strategist profile picture
>PMI CEO said "there is no reason to merge again", and we have no reason to discuss that again

Of course he's right, but that doesn't stop the usual suspects from ringing this bell every chance they can get.

>>That being said everyone must understand that any mention about a merger by anyone on the BOD of either company would be a "disclosure of inside information."

I disagree. First of all, inside information has to actually be disclosed for there to be a "disclosure of inside information". So not just "any mention" of a merger would qualify. EG, "We have no plans for such a merger" wouldn't qualify.

Next, and more important, once disclosed, its not inside information anymore, is it? CEOs are perfectly allowed to make previously inside information public. . .that's part of their job. So PM CEO absolutely **COULD** say "PM and MO are in discussions regarding a potential merger". He wouldn't because there are good BUSINESS reasons not to disclose that, but it wouldn't be illegal.

What would be illegal would be to ACT on inside information. That's a completely different issue/question.

In this case, if PM were in negotiations on a merger with MO, and the CEO states publically that this is NOT happening, he's putting out deliberately false information, and THAT is actionable in civil court. So he can't really do that.

So, if the CEO says its not happening, you can take that to the bank.

If it *WERE* happening, his answer to the question would be along the lines of "no comment".
CorvetteKid profile picture
When did PM's CEO state that, MO_Strat ?
mo_strategist profile picture
Never said he did. Don't ask me, ask showmedividendmoney (see above).

Again, I don't know if the PM CEO said that or not (see below), but I think its probably an accurate reflection of his belief, regardless.

Being Devil's advocate, even if he did say that, that statement alone wouldn't be prohibitive. Things can change, right?
PMI CEO said "there is no reason to merge again", and we have no reason to discuss that again
allday1234 profile picture
While the statement is probably correct as I have not seen that comment and you did not supply a link, but I have no reason to doubt you.
That being said everyone must understand that any mention about a merger by anyone on the BOD of either company would be a "disclosure of inside information." Something that is prohibited by the obligations that those members have with the companies. In some cases this could also be a violation of laws involving that disclosure. The CEO's comments should only reflect the Status Quo of the companies current position even if that statement is not true, but would reflect the current public position of the companies involved to prevent untold chaos with the the stock market within the companies involved.
REMEMBER : Rumors are just a story or statement in general circulation without confirmation or certainty as to facts:

I have owned both for over 25 yrs. Outstanding! However, in a retirement acct, in my opinion, these are no longer buy and hold. I sold PM at 122 and and bought again in the 90s. My opinion. Similar w MO.
mo_strategist profile picture
>>Will Philip Morris Acquire Altria?


If there is *ANY* such merger, it would be an acquisiton of Altria's tobacco companies from Altria (leaving beer, wine, and finance behind). But that won't happen either.

There is simply negligible economy of scale to be had there right now, and MO's stock is not cheap. So contrary to the published opinions of so-called analysts who are actually paid brokerage house, this is not in the cards .
percivalx profile picture
Several people on SA keep throwing out the idea that MO should acquire a company like DEO or SZTZ. They already have a large investment in BUD, would it be viable for them to go into another liquor company?
mo_strategist profile picture
Thank you for asking a sensible question.

Answer is "it depends". And it depends on the same two things that make ANY acquisition or merger make sense:

a. Does the price of the acquisition represent a value compelling enough to be worth allocating the resources to go through with it, and

b. Is there some synergy in the putative merger that will create or unlock extra value? That could be economies of scale in manufacture, distribution, marketing, R&D, management, etc.

On specifics, there is no reason Altria couldn't acquire Constellation or Diageo. Historically, this company (formerly "PM") owned finance, 7-up, beer, cigarettes, other packaged foods, etc. Those two "could" be a fit, but the devil is in the details, and I'd be lying if I said I knew enough of them to have formed some valuable opinion on the merits of these two potential acquisitions.
CorvetteKid profile picture
Inbev is a passive investment, not sure there are any synergies with taking on an active operational stake or buying a company outright.
StopPrintinMoney profile picture
Why did they spin it off few years back - just to merge with it again ????
theoptionrider profile picture
SPM - did you not read the article? He covers that
mo_strategist profile picture
Mostly to give "analysts" and seeking alpha writers something to post about.

I have yet to see anyone (including said analysts) post a convincing FINANCIAL analysis that shows this merger to be viable.

In the end, PM would be acquiring a business (or possibly more than one). Whether or not that acquisition makes sense depends on two things (and only two things): a. Will the merger create synergy (eg economy of scale, or some other mutual benefit) and b. PRICE.

Answering these:
a. Nil. For legal reasons, in any merger Altria and PM would remain separate companies with separate HQs, production, and management. Yes, there would be some savings by removing redundant top level mgmt, but we're talking pennies here. . .nowhere near enough to justify the cost of the merger.

b. Sure, given a low enough price it would make sense for PM to buy MO, regardless of any other factor. . .but MO probably wouldn't sell under those circumstances.
CorvetteKid profile picture
FWIW, I think $80 is doable for PM and very fair for MO.

Hell, even $76 might get it done.
theoptionrider profile picture
I really don't care what they do - I own both and both management teams know better than me. I will trust their judgement and keep collecting my dividends
Lynn Costlow profile picture
Merging MO and PM to share R&D expense for iqos makes no sense. The two separate companies already share those R&D expenses.
mo_strategist profile picture
PM own IQOS lock, stock, and barrel, and has paid, and is paying for all R&D expense.

MO has a licensing deal to sell IQOS in the USA, and PM is to get royalties on every stick sold.

A MO/PM merger *might* make sense if by acquiring MO, PM could, in effect negotiate a better deal and get more of this revenue. But this pre-supposes that a. there is a lot of revenue to be had (which remains to be seen. . .this product isn't on shelves yet) and b. that PM can acquire PMUSA at a reasonable price.

I don't think either thing is evident yet.
CorvetteKid profile picture
The fear is that e-cigs in general or a well-heeled competitor like BTI's GLO can come in and steal MO market share and it's a 100% net loss to MO.

At least with PM's iQOS they gain something, net of cannibalization.
mo_strategist profile picture
E-cigs have been around for a decade and haven't hurt MO any, with MO now also being in the e-cig market too.

If BTI wants to introduce Glo into the USA, it will have to go through the same FDA approval process that PM is under right now. It hasn't yet filed for that, and I think its probably watching PM/IQOS pretty closely. See here: http://bit.ly/2FG6DRH I don't think the FDA is going to accept "substantial equivalence" here, but we'll see.

But going back to the main point, I don't see how how a PM/MO merger stops competition. PMUSA is still going to have to defend its market share regardless of whether its owned by PM or MO. Its not like PMUSA has no resources or isn't profitable.
Jamjack profile picture
Long both, but I would rather not see the two combined.
didn't they spend it off about 4 yrs ago
arthur_bishop1972 profile picture
10 years ago
In my opinion NO this is pure hype for articles. Altria divested Kraft and Philip Morris and dealt with the legal situation here in the U.S. with the Master Tobacco Settlement. Why on earth would they want to face that nonsense again throughout the world? Look at Australia and the mindless gibberish going on there regarding trademarks. I find greedy poorly run nations a difficult environment to do business in. Altria through it’s diversification with InBev, wine, cigars, snuff and potentially marijuana once it is federally legalized has more then enough potential as a well run powerhouse.
Better for shareholders of both, for them to remain separate companies. PM may not have grown earnings comparibly with MO, however their share price valuation has been stellar since the original break up. And there would likely be considerable political opposition to such a re-combination. MO is also in prime position to benefit from the PM vaping technology, so why the need to combine togethet into a single corporate entity? Yes, there are dollar currency fluctuations over time, however by owning both companies, one can mitigate the negative effects on either firm with being on both sides of the currency equation. It would seem advantageous for shareholders owning both companies for them to remain as separate entities...
IZZKUBE2.5 profile picture
Providing a combined company would continue to pay & increase a minimum quarterly dividend of $7.08/shr/qtr...I'm all for it. Otherwise, without a similar quarterly dividend...we could accept an approx 28-35% premium over current pricing for whichever company is 'acquired'. Otherwise, we like the current structure & results.
IF both PM/MO want a merger,fine. Have owned for 32 years & will let THEM make the decision. They are truly the sharpest companies around.
Calico Cat profile picture
Win-win for me. Let management take the companies where they need to go. I've held both, MO and PM, for years, never worried. When you have the money, buy a few shares. Hold and enjoy your investment.
Cuip99 profile picture
I did my own merger, I own equal amount of shares in each company. That is good enough for me.
Dividends My Own Way profile picture
It makes sense to me, but like others said I'm covered either way since I own both.

Long MO, PM and VGR
Yup ! VGR also for the generous dividend and end of year stock distribution.

Many months ago I mentioned that it's a wonder they have not been taken out and the comments were they were too small.

My thinking is the real estate division which could be sold off.
hold all three and it only proves that vice always pays
Dividends My Own Way profile picture
I thought the same thing about VGR.

There is one thing I am unsure about if this happens that concerns me, and may be a reason VGR has remained independent.

What happens to the 66 per pack cost savings from the Master Tobacco Settlement if the company is bought out?

I don't know if these cost savings would transfer over to the new buyer, if the company was sold.
BA Man profile picture
If you can’t think of anything else to write about, you know the PM and MO owners will read an article like this.
Long PM and MO for the duration.
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