Friday was eventful for the $16 billion deal designed to reshape the U.S. tobacco industry.
The poor outcome of takeover target Swedish Match and the management of activist investor Elliott Management may still not be enough to deter Prime Minister Philip Morris International 3.34%
from pursuing their smoke-free future.
Swedish Match, a maker of oral nicotine pouches, said sales in the three months to September rose 5% in constant currencies, below the 9% forecast by analysts. Sales in Swedish Match’s cigar and lighter businesses fell by 14% and 18% respectively. Combined, these two units account for about a third of the group’s sales, so they dragged down the overall performance. The part of the business that PMI is really interested in, Swedish Match’s US non-combustible division, is booming, however.
The tobacco giant, which sells Marlboro cigarettes outside the United States, recently raised its offer for the company by 9.4% to 116 Swedish kronor, equivalent to $10.60 at recent exchange rates. It has ruled out raising the price again.
Hours after Swedish Match’s results were published, PMI raised the temperature by not lowering the deal’s approval threshold by the agreed deadline. To complete the deal, it still needs investors to tender 90% of the shares, which will not happen: a police report showed that Elliott Management has increased its stake in Swedish Match from 7.25% to 10.5%. This gives the hedge fund powers that could be very uncomfortable for PMI.
Minority shareholders who own more than a tenth of a share in a Swedish company have the right to request a certain dividend payment.
The bidder can still lower the threshold later. According to Sweden’s takeover rules, it can be lowered even after the offer deadline has passed. Investors are betting that the tobacco giant wants Swedish Match enough to go this route. The company’s shares are only 1.7% below the ISK 116 offer price. If they were worried that the PMI might go away, the stock would fall more, having traded around 80 kroner before the approach.
PMI wants this deal to go through. The battle for control of America’s profitable smokeless tobacco industry is intensifying. Altria,
which sells Marlboro in the US, this week announced a new partnership with Japan Tobacco that will eventually see the two companies introduce a heated tobacco product in the US
That said, their track record so far doesn’t suggest they can find a formidable competitor to PMI’s IQOS heated tobacco sticks.
Last week, PMI said it would pay $2.7 billion to buy back the distribution rights for IQOS from Altria. While this gives it an independent route into the US market, nothing can happen until the current deal between the two tobacco companies expires in 2024. Getting hold of Swedish Match in the meantime would help PMI enter more quickly.
The tobacco company wants to generate more than half of its net revenue from non-combustible nicotine products by the middle of the decade, up from about 30% today. It is important to open the US to get there. Elliott is making life difficult for the cigarette maker, but probably not enough to make him quit.
Write to Carol Ryan at email@example.com
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