Investors have good reason to keep their eyes on Swedish Match’s financial performance this year. The company is the subject of a $16 billion takeover deal by rival tobacco group Philip Morris International. This controversial plan drove shares of the Stockholm-based cigarette alternative manufacturer to a record high, with a 32% trading premium since the talks between the two companies were first announced last May.
The deal, which is now waiting on the approval of shareholders, is part of the Marlboro maker’s strides to subvert growing public scrutiny and reduce its reliance on traditional cigarettes. Fourteen years after splitting away from its US business amid shareholder demands for better returns, Philip Morris is making efforts to pivot back to the US market. Doing so will commence its competition with Altria Group Inc., its former US operation.
The move comes after a string of acquisitions that strengthens the company’s intention to take over the dominant position in the cigarette alternatives and smokeless products categories. Just last year, it agreed to take over Fertin Pharma, which produces a smoking-cessation aid, and OtiTopic, a respiratory drug developer. These bids alone pushed Philip Morris’ smoke-free product revenue up by 30% from zero in 2015.
Nicotine pouches are Swedish Match’s undeniable edge
Swedish Match’s impressive second-quarter profit of $535 million relied largely on its sales in the United States, making it an attractive subject for acquisition. Out of the company’s entire product line, its non-combustible nicotine pouches are the main driving force behind its formidable financial performance. Their ZYN pouches that are stocked by Prilla are one of the top nicotine pouch brands available on the American market. Aside from being tobacco-free, nicotine pouches have a longer shelf life and come in various flavors.
Nicotine pouches are the largest and most recent development within smoke-free products, and ZYN pouches deliver the highest quality through high-distillation extraction and purification procedures. These products have vital differences from other smoke-free alternatives, making them one of the most viable alternatives to smoking. Because they come in different strengths—from dry pouches, which contain 3mg of nicotine, to dry strong, which has 6mg—they deliver great value for their customers wanting to kick off their tobacco habit. These factors contribute to their growing popularity and open up greater opportunities for income growth in the US. This is a stark contrast to the declining performance of vaporizer manufacturer Juul due to the FDA’s move to ban e-cigarettes in the market amidst growing health concerns.
What the takeover means for Philip Morris at large
Philip Morris expects that the merger will result in three times net debt to adjusted earnings, fitting its plan to deleverage over the coming years. It also commits no material changes to Swedish Match’s operational structure, management, and employees.
However, Swedish Match’s outstanding market performance and operating profit give its shareholders a strong reason to oppose the upcoming takeover. Its recently reported $535 million tailwind earnings exceeded the market expectation of $500 million forecasted by analysts. Analysts at Barclays also posit that the price offer of $16 million is too low, given the opportunity Philip Morris sees in Swedish Match.
Reuters reports that Philip Morris is waiting on the decision of shareholders, as its executives will find it difficult to convince them of the urgency to close the takeover deal. Because its smoke-free products have continued to demonstrate impressive growth in the US, it seems that Swedish Match will be able to stand on its own for the foreseeable future.
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