Only a little over a decade after going their own way, Altria and Phillip Morris International (PMI) might be getting back together. The announcement will be welcome news to the investment banking community and to those looking for some distraction from near-constant coverage of geopolitical sabre rattling over Brexit and Sino-US trade tensions. In 2003, PMI rebranded itself as Altria and aimed to diversify away from cigarettes through a significant holding in Kraft, a move many perceived to be a feeble attempt to shake off the barrage of criticism around the health effects of smoking. By 2008, the two companies separated in an effort to insulate operations abroad from US tobacco. Altria became a US-only business, while PMI focused on the international stage, whilst maintaining the stake in Kraft to provide some protection against ongoing lawsuits and FDA scrutiny.
Fast-forward ten years. Both consumers and investors have become more aware of environmental issues, products’ impacts on society, and have more information at their fingertips to evaluate the company they are purchasing from. The widespread consideration of environmental, social, and governance (ESG) issues has led to the implementation of negative screening, and typically tobacco companies will be the first to feel the wrath of filters looking to remove companies that go against the ESG grain. However, despite being trapped in the “sin” bucket for several decades, both companies have been focusing on their next generation products (NGPs) in an effort to alleviate the strong stigma attached to smoking. Whilst litigation pressures may have eased from a decade ago, new threats remain in the form of restrictions on nicotine levels, a potential ban on menthol cigarettes, the ongoing debate on the dangers of NGPs, and attempting to reinvent a brand synonymous with cigarettes.
So why combine efforts again after a decade? In addition to an estimated annual cost saving of up to $1bn, as demand has fallen so too has criticism of tobacco diminished somewhat. While the two companies share the same cigarette portfolio, they have a complimentary products range in the alternatives space. The development of the IQOS product by PMI is unique, in the respect that the product will heat tobacco, as opposed to burning it. This stands in contrast to the vast majority of other businesses which have focused on promoting vaping as an alternative, of which Altria is part of. After more than a decade apart, it will be interesting to observe if a merger, new products and new marketing can breathe life into one of the most unloved sectors – or maybe it will all go up in smoke.