Altria Struggles to Quit Smoking

Smokers who have not cut back tend to look more aged than those who have. The U.S. tobacco industry is about to see the corporate equivalent as cigarette alternatives spark competition between the two companies behind the Marlboro brand, Altria MO 0.84%.

Philip Morris International (PM) is a leading international tobacco company. It produces and sells cigarettes and other tobacco products in markets around the world. PM is committed to providing adult smokers with the products they want, when they want them. The company's products are sold in more than 180 countries.

PMI's $16 billion takeover of Swedish Match looks set to go ahead. On Monday, the cigarette giant said it would own 83% of the European oral nicotine pouch maker following the completion of its offer. PMI needs 90% to delist Swedish Match and has given index funds and individual investors a further two weeks or so to tender their shares. All of the target's main shareholders have cashed in, including activist hedge fund Elliott Management, which had built a stake of more than 10%.

This deal will see PMI return to the US market for the first time in 14 years. Since it was spun out of Altria in 2008, PMI has distributed Marlboro cigarettes overseas, while Altria has continued to sell the brand in the US.

PMI is reducing its reliance on traditional cigarettes at a faster rate than its former owner. The company generates 30% of its net revenue from smokeless products, and is targeting a 50% share by the middle of the decade. This compares with roughly 10% for Altria in its latest quarter. PMI Chief Executive Jacek Olczak believes its IQOS heated tobacco brand can capture 10% of the U.S. nicotine market in volume terms by 2030. If Swedish Match is included, its overall market share in America could be significant.

The latest news from PMI is just the latest setback for Altria. Juul Labs, the vape brand in which Altria invested $12.8 billion four years ago, is reportedly considering filing for bankruptcy protection. In addition, Altria sold 9.2% fewer cigarettes in its latest quarter than in the same period last year. This number has been volatile since the pandemic began, but is expected to remain weak if PMI can convince more American smokers to switch to non-combustible products.

Altria will no longer have its main exposure to the heated-tobacco category when its exclusive agreement with PMI to distribute IQOS in the U.S. ends in 2024. The company will receive a $2.7 billion payment to end the tie-up early, which it could use to design a rival product. Altria also holds a 10% stake in Budweiser brewer Anheuser-Busch InBev that it could sell to fund investment in new brands or acquisitions.

The joint venture with Japan Tobacco, announced last month, looks like it may not be very successful. The agreement is not binding, and any new product the partnership produces must be commercialized and approved by the U.S. Food and Drug Administration. This means that PMI will have a head start of at least three or four years.

Even if Altria can come up with a great product quickly, it still faces challenges as noncombustible brands eat into sales of traditional cigarettes. PMI doesn't have this problem in the U.S., because it doesn't sell any cigarettes there. Altria could try to expand internationally, but this would dilute profit as overseas tobacco markets are less lucrative than the U.S.

Altria has invested billions of dollars in Juul and the on! nicotine pouch brand. However, most of this money has been lost, leaving a void that PMI is now moving into. Altria has rarely looked less healthy.