Cigarette giant Philip Morris International has a backup plan if its proposed acquisition of Swedish Match falls through. Expanding into the U.S. market on its own would still be a challenge, though, which could give activist investor Elliott Management Corp. an opening.
PMI, which sells the Marlboro brand internationally, has increased its bid for Swedish Match, a nicotine-pouch maker, to 116 Swedish kronor per share. This is equivalent to $10.35 at current exchange rates, and represents a 9.4% increase from the company's previous offer in May. The new offer price represents a 52.5% premium over Swedish Match's current share price. PMI has said that it will not raise the offer again, and Swedish Match shares are currently trading at 112.5 Swedish kronor, slightly below the new bid price.
PMI is paying $2.7 billion to end its U.S. distribution agreement with its former owner, Altria Group. Altria has exclusive rights to sell IQOS heated tobacco sticks in America, but the two companies have been unable to make much progress due to a patent dispute with R.J. Reynolds Tobacco. The current agreement will continue until April 2024, but it will not be automatically renewed for a further five years.
PMI plans to buy back the distribution rights to its heated tobacco brand, giving it full control over the rollout in the lucrative U.S. market in 18 months. However, its expansion plans will be smoother if it can also buy Swedish Match, which already sells in 150,000 outlets across the country.
PMI would need to develop relationships with retailers from scratch to build out a distribution network on its own. The company thinks this could be achieved in around two years. However, people with knowledge of the U.S. tobacco market say that four to five years is probably more realistic, based on IQOS's rollout in other markets such as Japan.
PMI's efforts to take over Swedish Match have been complicated by Sweden's generous takeover rules, which protect minority shareholders. In order to delist the company, PMI needs to persuade 90% of Swedish Match investors to sell their shares. Even with the increased offer, this looks challenging: Elliott owns 7.25% of Swedish Match shares and argues that the business is worth more than the current offer. Long-term holders of at least another 2% want the business to remain independent.
PMI could lower the acceptance threshold five days before the offer period ends on Nov. 4, but would then need to negotiate new terms with minority investors later on.
Analysts at Cowen point out that when camera maker Canon bought Lund-based Axis in 2015, it eventually acquired Elliott’s 10.01% stake in the business at a 7% premium to what it offered other shareholders. However, this happened more than three years after the original tender period ended. PMI will want to avoid a similar limbo.
In eight days, Swedish Match will report its quarterly results. This will give investors more information about the company's prospects as a stand-alone business. They will then be able to decide whether or not to sell their shares. PMI has made it clear that it does not need Swedish Match, but its expansion into America will be more difficult without it.
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