Swedish cigar-less match attracted Marlboro Man

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A spectator smokes a cigar in Augusta, Georgia, United States on November 13, 2020. REUTERS / Brian Snyder

LONDON, Sept. 15 (Reuters Breakingviews) – Swedish Match (SWMA.ST) may fuel the mergers and acquisitions addiction of Philip Morris International (PM.N). The nicotine and oral tobacco packet maker said on Wednesday it would turn its cigar business into a smoke-free business. This makes it more appealing to PMI Managing Director Jacek Olczak and his ambitious non-fuel goals.

The Marlboro man buying Swedish Match isn’t a new idea. But tobacco pouch maker Scandi Snus has always seemed expensive and could become even more expensive without cigars. While some institutional investors shy away from tobacco altogether, others consider the direction of a company’s travel. So, abandoning its cigars could mean increased demand for Swedish Match actions. After Wednesday’s 4% gains, it is trading at 22 times this year’s earnings. By comparison, the $ 160 billion PMI, an outperforming Big Tobacco, trades 17 times.

But medium-term financial returns may not be Olczak’s top priority. He wants PMI to generate more than half of its revenue from smoke-free products by 2025, as part of a wacky plan to turn PMI into a “wellness business.” Analysts polled by Refinitiv expect Swedish Match to generate $ 2.7 billion in revenue in 2025. Assuming cigars stay around $ 600 million this year, an acquisition would buy Olczak nearly $ 2.2 billion in smoke-free sales. That’s just 6% of PMI’s $ 36 billion forecast revenue for this year. Added to the 28% smoke-free income split the company disclosed in April, Olczak still has a long way to go.

Its recent acquisition of British inhaler maker Vectura (VEC.L) is of limited help, bringing perhaps $ 300 million in sales in 2025. Instead, the primary importance of the deal shows that ‘Olczak is ready to spend the money: he spat 60% premium after a bidding war with Carlyle (CG.O).

Besides its price, Swedish Match is a flawed match in other respects. A tenth of his cigar-free income comes from lighters, technically a smoke-free product but not the ideal solution for a health-conscious PMI. Unfortunately for Olczak, there are very few other targets to reach their destination. With the ground he needs to catch up, he will need all the help he can get when it comes to mergers and acquisitions.

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NEWS CONTEXT

– Swedish Match will divest its cigar business, the oral tobacco company announced on September 15, as part of its switch to smoke-free products.

– Since 2015, cigar brands’ revenues, including White Owl and Game, have increased by approximately 10% on a compound year basis, from $ 313 million to $ 493 million. Operating profit increased 54% over the same period to reach $ 195 million.

– Goldman Sachs advises Swedish Match on the planned spin-off, which is expected to close in the second half of 2022 at the earliest.

– Shares of Swedish Match rose 4% to SEK 81.50 at 0808 GMT on September 15.

Editing by Ed Cropley, Oliver Taslic and Karen Kwok

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