Summary
- Since Philip Morris was spun out of Altria in 2008, both companies have chosen diverging paths to manage changes in the tobacco industry.
- Philip Morris has suffered through serious foreign exchange headwinds since 2014, while its cigarette volume performance has turned negative.
- Altria is facing its own challenges, in particular, the regulatory threats related to cigarette nicotine levels and menthol flavors.
- The 2008 demerger of Philip Morris and Altria was a strategic mistake: time for a Marlboro re-merger.
This year marked the tenth anniversary of the separation between Altria (MO) and Philip Morris (PM). The de-merger of the Marlboro owner and its international branch was designed to insulate the growing international cigarette business from the extensive litigation suffered by its mature US parent company. Ten years on, it is becoming ever more clear that the separation was a strategic miscalculation. It's true that it has insulated Philip Morris International from US litigation, but it has also laid bare serious vulnerabilities at both Altria and Philip Morris. In this article, I will explain why a unified company would have been less vulnerable, and why it makes sense to re-merge Altria with Philip Morris. In 2008, it was to be expected that Altria would be the smaller and slower growing of the two companies, while Philip Morris held promise for higher volume growth in the emerging markets of Eastern Europe, the Middle East, Africa, and Asia. The first years went more or less according to plan; Philip Morris booked steady volume gains and added the occasional acquisition, while Altria focused on squeezing as much value from the US business as possible, mostly through price increases on its cigarette products. Altria also diversified by buying the leading smokeless tobacco business in the United States, UST, in a deal announced in 2008. The first company to show signs of a potential weakness that was not given due consideration prior to the separation was Philip Morris. As a US company with its headquarters in New York, Philip Morris reports its earnings in US dollars and pays its dividends in dollars, yet it has very little dollar-based earnings. This exposes the company to currency fluctuations, which can be quite volatile, especially during times of economic distress. Starting in 2014, when the US central bank announced its intention to start tapering its quantitative easing programs, first implemented in the aftermath of the 2008-2009 financial crisis, the US dollar started its steady ascent against most other currencies. https://seekingalpha.com/article/4228988-altria-philip-morris-case-marlboro-merger
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