Two tobacco giants negotiate a merger, aiming at electronic cigarette market

Two major international tobacco giants, Philip Morris International and Altria Group, are negotiating a merger, which could lead to the reunion of the world’s two largest tobacco companies in more than a decade.

The aim of the deal is also to control the fast-growing e-cigarette market.

For a long time, analysts and investors have speculated that the two companies will merge because of the huge pressure on them from falling cigarette sales and the need to invest in other sources of income.

According to Cowen’s analysts, cigarette sales across the industry declined by 4.5% in 2018 after adjustment. By contrast, Mordor Intelligence, a research firm, shows that the market value of e-cigarettes in 2018 is about $11 billion, and the annual growth rate is expected to exceed 8% in the next five years.

In April, Philip Morris won approval from the Food and Drug Administration (FDA) to sell a heated tobacco product called iQOS in the United States, a major victory for companies wishing to surpass traditional cigarettes.

Unlike flammable cigarettes, iQOS devices heat paper-wrapped cigarette sticks to produce nicotine-containing aerosols. Unlike the popular Juul electronic cigarette, which vaporizes a liquid filled with nicotine.

Altria, which owns 35% of Juul Labs Inc., has marketed iQOS as part of its licensing agreement with Philip Morris.

Bonnie Herzog, an analyst at Wells Fargo Bank (44.75, – 0.23, – 0.51%) said in a unanimous customer report that Juul would be an ideal partner for Philip Morris’international expansion.

Herzog added that if Philip Morris had complete control over sales and distribution, it could accelerate iQOS growth in the United States.

Philip Morris earned nearly $30 billion a year, while Altria earned about $20 billion last year. Both companies said there was no guarantee of an agreement.

Any transaction requires the approval of the respective boards of directors and shareholders of the two companies, and may face strict regulatory approval. A merger agreement would create a tobacco giant with a market capitalization of more than $200 billion.

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