Philip Morris International Inc. and Altria Group Inc. ended merger talks, walking away from a deal that would have reunited the giants of the U.S. and international tobacco industries and pointed them both to a future beyond cigarettes.
The unwinding of the talks, which would have been the largest since AT&T Inc.’s bid for Time Warner in 2016, comes amid a health crisis over the use of electronic cigarettes that have sickened more than 500 people and been blamed for at least seven deaths. Also, Altria Chief Strategy and Growth Officer K.C. Crosthwaite stepped down from the company to become CEO of Altria-backed vaping company Juul Labs Inc., replacing Kevin Burns.
Philip Morris board members met yesterday and decided to pull the plug on the talks, according to a person familiar with the matter. Before then, the companies had been working toward completing the deal as recently as this week, with plans to get a fairness opinion from bankers on the deal terms over the weekend, the person said. Regulatory scrutiny of vaping may have played a role in the decision, affecting the timing of a deal that otherwise would have benefited both parties, the person said, asking not to be identified discussing private information.
“It appears to us the talks fell apart over Juul,” Bonnie Herzog, an analyst at Wells Fargo, said in a note. “Obviously the timing of the merger wasn’t right given escalating negative regulatory headlines. But we still see the merits of this combination and wouldn’t be surprised if talks resume at some point in the future when the environment is better.”
Shares of Philip Morris jumped as much as 8.8% on Wednesday -- the most in more than two months. Altria stock climbed as much as 2.3%.
“While we believed the creation of a new merged company had the potential to create incremental revenue and cost synergies, we could not reach agreement,” said Howard Willard, Altria’s chairman and chief executive officer. Both he and Philip Morris CEO André Calantzopoulos said the companies would focus on launching PMI’s IQOS heat-not-burn device in the U.S.
In December, Altria bought a 35% stake in Juul in a $12.8 billion deal. With smoking in decline, the tie-up that left Juul operationally independent was intended to help Altria expand further beyond cigarettes and into higher-growth businesses.
“I’m a little surprised it isn’t happening,” said Jonathan Fell, principal at London-based investment manager Ash Park, which owns shares in Philip Morris and Altria. “But in the end the current vaping panic in the U.S. was probably the wrong back-drop to finalize a deal. Perhaps PMI was worried that the launch of IQOS would be tarred by association with the vaping battle.”
When asked for further details on why the discussions ended, Altria spokesman David Sutton said the company “saw an opportunity that, under the right conditions, could add value to our shareholders. Ultimately, however, we were unable to reach agreement.”
Altria reaffirmed its full-year financial guidance today, and Sutton also said the company remains “confident in our standalone plan.”
Philip Morris, the maker of Marlboro cigarettes in overseas markets, and Altria said in August that they were in talks to reunite more than 10 years after splitting their operations.
A reunification would have combined two of the most popular smoking alternative products: Philip Morris’s IQOS and Juul. Altria has also invested in cannabis companies and holds a 10% stake in beer giant Anheuser-Busch InBev.