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Philip Morris Increases Offer for Swedish Match and Acquires U.S. Rights for IQOS

Philip Morris International Inc. has raised its offer for Swedish Match AB by 9.4% and has agreed to pay $2.7 billion to regain the U.S. rights for its IQOS heated tobacco products from Altria Group Inc.

October 20, 2022
7 minutes
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Philip Morris International Inc. has raised its offer for Swedish Match AB by 9.4% and has agreed to pay $2.7 billion to regain the U.S. rights for its IQOS heated tobacco products from Altria Group Inc.

Philip Morris has increased its offer for Swedish Match shares to 116 Swedish kronor, equivalent to $10.34. This is up from the original offer in May of 106 Swedish kronor. The appreciation of the U.S. currency against the Swedish krona has made it easier for the company to raise its offer.

The current bid values Stockholm-based Swedish Match at 176.4 billion Swedish kronor, or $15.7 billion. That is roughly in line with the initial bid's value of $16 billion.

Philip Morris has announced that it is raising the price of its cigarettes due to inflation, volatility in equity markets, and changes in interest rates. This is in line with what was previously reported by the Wall Street Journal.

Philip Morris is facing pressure from Elliott Management Corp. and other investors to improve its bid, which could lead to a standoff if the current offer continues to be rejected. Philip Morris has said that it will not increase its bid any further.

A spokesperson for Elliott declined to comment.

Philip Morris has agreed to buy back the U.S. commercialization rights for IQOS, its heated tobacco device, from Altria, the companies said.

The deal between Philip Morris and Swedish Match will take effect on April 30, 2024, and will allow Philip Morris to market IQOS in the United States through the Swedish Match sales force. Philip Morris is also prepared to sell IQOS in the United States on its own, Philip Morris Chief Executive Jacek Olczak said. The deal includes an upfront payment of $1 billion, with the rest to be paid by July 2023, Altria said.

Altria introduced IQOS in the U.S. in 2019, but had to stop importing it last year due to a patent dispute. Philip Morris plans to begin manufacturing IQOS in the U.S. next year so that it can resume selling the product in the U.S.

Altria Chief Executive Billy Gifford said that the payments from Philip Morris will give the company greater flexibility to allocate resources toward its plan to expand into smoke-free products. This is a positive step for Altria, as it looks to diversify its product offerings and move away from traditional cigarettes.

Philip Morris is looking to increase its revenue from smoke-free products to more than 50% by 2025. To achieve this, the company is selling IQOS outside the U.S. and proposing to buy Swedish Match.

IQOS is a device that heats tobacco but doesn’t burn it or produce smoke when users inhale. It is an alternative to e-cigarettes, which create an aerosol from a nicotine liquid.IQOS is a device that heats tobacco but doesn’t burn it. This produces a vapor that the user inhales. It is an alternative to e-cigarettes, which create an aerosol from a nicotine liquid.

Philip Morris and Altria have been in a dispute over IQOS, which they introduced into the U.S. through a partnership. Philip Morris argued that Altria hadn’t met the agreed-upon sales targets for IQOS that would allow Altria to extend its exclusive U.S. rights. Altria said that it had. The two Marlboro makers will now pursue competing products in the U.S.

Altria, which sells Marlboro cigarettes in the U.S., said it expects to complete the design for its own new heated tobacco device by the end of 2022. The company would then need to seek FDA authorization for the device. Altria is also the largest shareholder in Juul Labs Inc., an e-cigarette maker that is in a dispute with U.S. officials over whether it can remain on the U.S. market.

The friendly deal between Philip Morris and Swedish Match is still conditional on the tobacco company gaining at least 90% of Swedish Match's shares. This would allow Philip Morris to squeeze out any residual shareholders by paying them the same price as other investors, and then fully fold the business into its own.

Elliott's 7.25% stake in Swedish Match could play a crucial role in determining Philip Morris's ability to achieve its goal, as it is almost big enough on its own to prevent Philip Morris from reaching its threshold.

Philip Morris has said that it is prepared to abandon its current offer if it cannot reach a support level of 90%.

"If the offer is not successful, we are prepared to proceed independently to develop IQOS and the rest of our smoke-free products in the United States," said Philip Morris's Mr. Olczak.

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