Shares in tobacco stocks traded higher following news overnight that US firm Philip Morris (PM:NYSE) was in talks to buy its smaller competitor Swedish Match (SWMA:STO).

Swedish Match shares jumped 25% to SEK 94, while British American Tobacco (BATS) added 1.5% to £33.50 and Imperial Brands (IMB) climbed 2.6% to £16.96.

ATTRACTIVE BLEND

Unlike Marlboro-maker Philip Morris, Swedish Match doesn’t actually make cigarettes, in fact its ‘vision’ is a world without cigarettes.

Its main products are smoke-free, such as snus or snuff, nicotine pouches, chewing tobacco, matches and lighters, while it also manufactures cigars.

In the US, the firm has the leading brands in nicotine pouches and chewing tobacco and the number two brand in mass-market cigars.

Smoke-free products make up more than two-thirds of sales and close to three quarters of operating profits.

As such, Swedish Match is an attractive proposition for a cigarette-maker like Philip Morris to diversify away from its core business without having to spend time and money developing new products.

The firm posted record full year revenue and operating profits in 2021 with double-digit sales growth across all product categories.

WIDELY OWNED

Thanks to its high margins and steady cash flows, Swedish Match is a popular holding for many European and global fund groups.

Also, thanks to its focus on smoke-free products, it ticks the right boxes for ethical funds who typically have to scratch tobacco firms from their portfolios.

US firms are amongst the biggest holders, with BlackRock, Capital Group, Cedar Rock, Fidelity, Vanguard and Wellington Management controlling more than a quarter of the votes.

While no price has been mentioned officially, the Financial Times has speculated the price could be in the region of $16 billion or SEK 160 billion in total, including debt of around $1.4 billion.

That would suggest an equity valuation of $14.6 billion or SEK 146 billion against a current market capitalization of SEK 116 billion.

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Issue Date: 10 May 2022