Wells Fargo: Chance Of A Philip Morris-Altria Merger Now 70%

Wells Fargo said the probability of Philip Morris International Inc. PM acquiring Altria Group Inc MO in the next several months is now at 70 percent, according to a Barron's report.

History Of Altria And Philip Morris

Altria spun off Philip Morris’ overseas operations in 2008 as Philip Morris International to unlock additional value. Altria is still the parent company of Philip Morris USA.

But, the declining tobacco market made the attractive yesteryear tobacco spinoffs now less attractive given higher costs and falling tobacco sales and consumers turning toward healthy alternatives. Peers, British American Tobacco PLC (ADR) BTI and Reynolds American, Inc. RAI, which also used to be part of the same company before breaking up, are also rumored to be working on a merger.

Keys To Speculated Merger

Barron's, citing a note from analyst Bonnie Herzog, said the key reasons for the speculated Altria–Philip Morris merger is potential corporate tax reform, strong dollar and diversification possibilities.

Further, Herzog noted that the potential combination of British American Tobacco  and Reynolds American, would force Philip Morris to look at a reunion with Altria to strengthen itself in the race for reduced risk products.

Finally, Herzog opined that iQOS is worth more to Philip Morris by owning Altria.

“Philip Morris will capture the full margin and accelerate the growth of iQOS in the U.S. given its full control over sales and distribution generating cumulative, incremental operating income of $26.2 billion (3x greater) by 2025 or $8/share of greater value,” Barron's said citing Herzog.

The report added that Herzog believes the potential deal will be accretive in year one with Philip Morris paying up to $77/share for Altria, the owner of Marlboro, Black & Mild, Copenhagen and Skoal. The price represents a 15 percent premium over Altria’s Friday closing price around $67.

Rating

Herzog reiterated her Outperform ratings on Philip Morris and Altria and made Altria her new Top Stock Pick due to the increased probability of the deal. In addition, the analyst also cut her FY 2017 EPS estimate for Philip Morris by $0.24 to $4.70 and valuation range by $5 to $109–$111. However, she maintained her valuation range of $73–$75 for Altria.

At last check, shares of Philip Morris were almost flat at $91.32, while Altria shares had risen 1.06 percent to $67.75.