Cigarless Swedish Match has pull for Marlboro Man

3 minute read

A spectator smokes a cigar in Augusta, Georgia, U.S., November 13, 2020. REUTERS/Brian Snyder

LONDON, Sept 15 (Reuters Breakingviews) - Swedish Match (SWMA.ST) can feed Philip Morris International’s (PM.N) M&A addiction. The nicotine pouch and oral tobacco maker on Wednesday said it would spin off its cigar business to become a smoke-free company. That makes it more attractive for PMI Chief Executive Jacek Olczak and his ambitious non-combustible goals.

The Marlboro Man buying Swedish Match is hardly a new idea. But the maker of Scandi Snus tobacco pouches has always looked expensive, and could become even more so sans cigars. While some institutional investors shun tobacco outright, others consider a company’s direction of travel. Thus ditching its cigars may mean more demand for Swedish Match shares. After Wednesday’s 4% gains, it trades at 22 times this year’s earnings. By comparison, $160 billion PMI, a Big Tobacco outperformer, trades at 17 times.

But medium-term financial returns may not be Olczak’s top priority. He wants PMI to generate over half its revenue from smoke-free products by 2025, part of a far-fetched plan to transform PMI into a “wellness company”. Analysts polled by Refinitiv expect Swedish Match to have $2.7 billion of revenue in 2025. Assuming cigars stay around this year’s $600 million, an acquisition would buy Olczak nearly $2.2 billion in smoke-free sales. That’s just 6% of PMI’s $36 billion of forecast revenue for that year. Tacked on to the 28% smoke-free revenue split that the company disclosed in April, and Olczak still has a long way to go.

His recent acquisition of UK inhaler maker Vectura (VEC.L) is of limited help, bringing perhaps $300 million of sales in 2025. Instead, the deal’s main significance is showing that Olczak is prepared to splash the cash: he coughed up a 60% premium after a bidding war with Carlyle (CG.O).

Besides its price, Swedish Match is an imperfect match in other respects. A tenth of its cigarless revenue comes from lighters, technically a smoke-free product but not the ideal fit for a health-conscious PMI. Unfortunately for Olczak, there are precious few other targets to get to his destination. Given the ground he needs to make up, he’ll need all the M&A help he can get.

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- Swedish Match will spin off its cigar business, the oral tobacco company said on Sept. 15, as part of its switch to smoke-free products.

- Since 2015, revenues of cigar brands including White Owl and Game have grown by around 10% on a compounded annual basis, from $313 million to $493 million. Operating profit has grown 54% over the same period to $195 million.

- Goldman Sachs is advising Swedish Match on the intended spinoff, which is expected to conclude in the second half of 2022 at the earliest.

- Swedish Match shares rose 4% to 81.50 Swedish crowns by 0808 GMT on Sept. 15.

Editing by Ed Cropley, Oliver Taslic and Karen Kwok

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