Tobacco giants Philip Morris and Altria in $200bbn merger talks

Philip Morris International is in talks to merge with Altria in a deal that would connect the global and domestic makers of Marlboro and create the world’s largest tobacco group  with a market value of  £163bn ($200bn). PMI said it was considering an all-share combination that would put it back together with Altria, 11 years after they were separated to shield PMI form a slowing US cigarette market and the threat of new regulation and litigation.

The deal would create a vast business that last year reported sales of $50bnand net income of $15.3bn and would enable both companies to combine forces in alternative smoking technologies that are crucial to surviving the decline in traditional tobacco cigarettes.

Eight million people die as a result of smoking every year. There are 14m adult vipers in the US alone alongside 39m, adults who smoke cigarettes.

The acquisition of Altria by PMI would be the sixth largest takeover ever as shares in Altria rocketed as much as 11.3 per cent before falling 2.5 per cent to $45.94, although its market value sat at $85bn and the company has $27bn net debt. PMI fell 7.1 per cent to $72.22, bringing its market value to $11.3bn and has a net debt of $26.5bn.

Only couple of years ago rival British American Tobacco completed a deal to buy Reynolds American for $49.4bn.

Tobacco groups are racing to increase their presence in electronic cigarettes and heated tobacco technology as last year Altria agreed to take a 35 per cent stake in e-cigarette group Juul Labs for $13bn. The new acquisition will allow PMI to capture the full value of it IQOS heated tobacco technology, which Altria is preparing to launch under licence in the US.

The two companies have taken different approaches to the fast-growing cannabis market.  PMI believes that marijuana remains too risky to invest in, while Altria has taken a $2.4bn, 45 per cent stake in the Canadian Group Cronos.

In 2008 the split of Altria and Philip Morris International would free a faster-growing international division to pursue the emerging markets consumers who are trading up  from the US operation hobbled by years of litigation and an inevitable decline in the number of smokers.

PMI has invested $6bn in the past decade more than any rival to develop a product that heats tobacco for a cigarette-like experience that exposes smokers to fewer harmful chemicals than burning the tobacco leaf does. The merger would boost PMI’s earnings and extract $400m in savings.