Investors' Soapbox: Philip Morris Could Pay 20% Premium to Buy Altria -- Barrons.com
DOW JONES & COMPANY, INC. 11:25 AM ET 5/23/2017
Symbol Last Price Change
MO 72.205 +0.165 (+0.23%)
QUOTES AS OF 11:25:58 AM ET 05/23/2017
(The opinions contained in Investors' Soapbox in no way represent those of Barrons.com or Dow Jones & Company, Inc. The opinions expressed are those of the newsletter's writer(s) or analysts at research firms. Some of the research firms have provided, or hope to provide, investment-banking or other services to the companies being analyzed.)
Wells Fargo Securities
We believe current market conditions improve the economics and reinforce the likelihood that a Philip Morris International/ Altria Group deal gets done sooner rather than later.
While Philip Morris remains our top long-term stock pick with more upside potential over the long- term, Altria(MO) remains a very close number 2 since we think the market is underestimating [tobacco heating system] iQOS's value (a $12-a-share opportunity with less than 25% currently priced in), upside potential from the Anheuser- Busch InBev stake, and the potential that Philip Morris acquires Altria(MO).
As such, we reiterate our Outperform ratings on Philip Morris and Altria(MO) and our $140 and $80 price targets on the stocks, respectively.
We reiterate our strong conviction in a Philip Morris/Altria Combo (70% probability).
We've been fielding an increasing number of calls recently from investors trying to gauge deal probability, potential entry points, and trading scenarios. While we stop short of recommending a pair trade given our bullish outlooks on both Philip Morris and Altria's(MO) fundamentals and potential upside from iQOS, we do think the environment looks increasingly attractive for a Philip Morris/Altria(MO) combo with more potential near-term upside for Altria(MO). We reiterate our conviction in a deal materializing in the next several months (about 70% probability) with Philip Morris paying at least a 20% premium to acquire Altria(MO) implying a conservative fiscal 2016 enterprise value (EV)/earnings before interest, taxes, depreciation and amortization (Ebitda) multiple of about 16 times (versus British American Tobacco's (BTI) 17.3 times multiple for Reynolds American (RAI)) based on: 1) a widening valuation spread between Philip Morris and Altria(MO); 2) British American's strong stock performance reflecting the market's support of its acquisition of Reynolds; and 3) improved economics of a potential deal given Philip Morris' recent stock outperformance.
What has changed? Relative valuation multiples for Philip Morris and Altria(MO) have significantly widened since March, with Philip Morris now trading at a 1.5 multiple spread (on both an next-12-months price/earnings multiple and EV/Ebitda basis) to Altria(MO), which is the widest spread in over a year.
The widening spread is largely due to downward pressure on Altria(MO), which we think reflects: 1) recent softness in Marlboro fundamentals (we think this can be more than offset by strong pricing and positioning); 2) some unwinding of the Trump trade (i.e.; U.S. corporate tax reform delay); and 3) profit-taking.
We think the current set-up favors arbs in the near term, but would caution against shorting Philip Morris given the clear and strong momentum we're seeing in iQOS (launching next month in South Korea), improving margins and moderating exchange-rate headwinds.
Why Combine? We believe a Philip Morris-Altria merger makes sense given: 1) iQOS is worth more to Philip Morris by owning Altria(MO) outright (Philip Morris can capture "full" margin versus just royalty); 2) the growing need for scale/ innovation in global "arms" race in reduced-risk products (RRPs); 3) the potential for U.S. corporate tax reform and more favorable tobacco regulations and excise taxes; 4) the benefit of accessing Altria's(MO) significant cash flow in the U.S. to pay dividends and a return to a robust share-repurchase program; 5) the improved and potentially accelerated rollout of iQOS globally; 6) more diversified geographic exposure which will reduce the impact of exchange-rate headwinds; and 7) the potential to leverage attractive cannabis market if/when it's legalized federally in the U.S.
-- Bonnie Herzog -- Patty Kanada -- Adam Scott
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05-23-171125ET
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