NEW YORK (Reuters Breakingviews) - Merger talks between Altria and Philip Morris International are off, but a deal could still rise from the ashes. The idea of a $187 billion combination has sputtered amid turmoil at Juul Labs, of which Altria owns 35%. The market is already suggesting that the vaping upstart is worth less than what Altria paid in December 2018. If it continues to fall, the logic of a combination could bring Philip Morris back for another pull.
Juul, which replaced co-founder Kevin Burns as chief executive on Wednesday, has been hit hard by sales bans triggered by unexplained respiratory illness among vapers. It already had powerful critics, including the U.S. Food and Drug Administration, for attracting teenage fans. Altria has now taken the reins, putting one of its executives, K. C. Crosthwaite, in charge of Juul. It’s easy to see why Philip Morris – which split from Altria in 2008 to distance itself from U.S. regulatory risk – would rather hold back.
Even with Juul’s problems, Altria looks curiously cheap. Its roughly $100 billion enterprise value is just a little more than the 9 times estimated EBITDA that rival British American Tobacco trades on. Since almost all that EBITDA comes from traditional cigarettes, it suggests investors are ascribing barely any value to Juul. That means most of the $12.8 billion Altria paid for a 35% stake last year has gone up in smoke.
Most of the logic of a tie-up remains. When British American Tobacco reunited with its former U.S. division Reynolds American in 2017, they outlined $400 million of potential annual cost-savings. Altria will distribute Philip Morris’s heated tobacco product – an alternative to cigarettes that hasn’t received the same level of criticism as vaping – in the United States. Tax Altria’s $10.8 billion of forecast operating profit for next year, using data from Refinitiv, and it suggests a buyer could pay around $120 billion and still make a 7% return on investment.
Juul could, of course, be a liability rather than an asset if lawsuits proliferate and regulatory anger over teen vaping intensifies. But the most likely outcome is that Juul’s product is restricted, taxed and allowed to remain on the market. The possibility of buying a discounted Altria and a free Juul might eventually persuade Philip Morris to come back to the table – once things have cooled down.
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