Philip Morris International which is famous for Marlboro, the world’s best-selling cigarattes, will buy Swedish Match with an equity vaule of $15.7bn.

Philip Morris International has agreed to buy Swedish Match in a deal that gives Swedish Match an equity value of approximately $15.7 billion and implied enterprise valuation of just under 17 times 2023 EBITDA which represents the strategic acquisition of a fast-growing, high quality consumer staples business with excellent profitability, and the potential for significant revenue synergies.

Philip Morris International?(PMI) is a leading international tobacco company working to deliver a smoke-free future and evolving its portfolio for the long term to include products outside of the tobacco and nicotine sector. The company’s current product portfolio primarily consists of cigarettes and smoke-free products, including heat-not-burn, vapor, and oral nicotine products, which are sold in markets outside the?U.S.?Since 2008, Philip Morris International? has invested more than?$9 billion?to develop, scientifically substantiate, and commercialize innovative smoke-free products for adults who would otherwise continue to smoke, with the goal of completely ending the sale of cigarettes.

14 September 2022 Philip Morris International announced that it has appointed two former United States Food and Drug Administration (U.S.?FDA) officials which highlights Philip Morris International’s commitment to smoke-free products.

Philip Morris International has two smoke-free product research facilities in Singapore and Switerland.

Philip Morris International's leading international brands include Bond Street, Chesterfield, Next, Red & White, Marlboro, L&M, Lark, Merit, Muratti, and Philip Morris.

Philip Morris International's cigarette portfolio is led by Marlboro, the world’s best-selling international cigarette. Philip Morris International's smoke-free portfolio is led by its IQOS heated tobacco brand.

20 October 2022, Philip Morris International announced an agreement with Altria Group, to end the companies’ commercial relationship covering?IQOS?in the?U.S.?as of 30?April 2024. Thereafter, Philip Morris International will have the full rights to commercialize?IQOS?in the?U.S.?As part of the agreement, Philip Morris International will pay a total cash consideration of?$2.7 billion, of which?$1.0 billion?was paid at the inception of the agreement using available cash. The remaining?$1.7 billion, plus interest, will be paid by?July 2023?at the latest.

Swedish Match is a decent business.

Its sales have grown by a compounded average growth rate of +17%?between 2018-2021, +570bps Operating Margin expansion between 2018-2021, and cash from operating activities grew by a compounded average growth rate of +20% between the same period.

Over two-thirds of Swedish Match's revenue comes from smoke-free products. The largest contributor to both revenues and profits is the Swedish?Match portfolio of smokefree products.

Philip Morris International is seizing the U.S. smoke-free opportunity with substantial platform. The U.S. is the world’s largest smoke-free and nicotine market by value, providing better alternatives to continued smoking for ~34 million adult Americans who smoke.

As of September 30, 2022, Philip Morris International estimated that approximately 13.5 million adults around the world, excluding Russia and Ukraine, had already switched to?IQOS?and stopped smoking.?IQOS?user metrics reflect Philip Morris International estimates, which are based on consumer claims and sample-based statistical assessments with an average margin of error of +/-5% at a 95% Confidence Interval in key volume markets. The accuracy and reliability of?IQOS?user metrics may vary based on individual market maturity and availability of information.

Philip Morris International is aiming for smoke-free products to account for more than 50% of its total net revenues by 2025. Swedish Match will accelerate this plan.

How will Philip Morris International?fund the $15.7 billion?

Philip Morris International expects to fund the transaction through a combination of debt market and bank financing as this is an all-cash transaction. Philip Morris International has the balance sheet to sufficiently cover this.

Philip Morris International's total debt was $27.8 billion at December 31, 2021, and $31.5 billion at December 31, 2020. Our total debt is primarily fixed rate in nature. The weighted-average all-in financing cost of our total debt was 2.4% in 2021 and 2020.?

For Q3 of 2022, Philip Morris International had strong year to date operating cash flow growth which is continuing growing to ~$10.5bn for full-year. $22.5bn is the operating cash flow over 2021-2022.

Also for Q3 of 2022, Philip Morris International's net debt was $1.5bn lower when compared to December 2021, and is now below 1.6x Adjusted EBITDA

However, Philip Morris International expects net debt to adjusted EBITDA to increase to 3x in 2022 due to the acquisition of Swedish Match which will be funded by through a combination of debt market and bank financing.

Philip Morris International expects to deleverage quickly thereafter, targeting strong investment grade rating over time.

Has the situation between Russia and Ukraine impacted Philip Morris International?

25 Feb 2022, Philip Morris International announced the temporary suspension of its operations in Ukraine, including at its factory, in Kharkiv.

In 2021, Ukraine accounted for around 2% of Philip Morris International’s total cigarette and heated tobacco unit shipment volume and under 2% of Philip Morris International’s total net revenues. As of 31 March 2022, Philip Morris International's Ukrainian operations had $400 million in total assets.

In 2021, Russia made up almost 10% of total shipment volumes and around 6% of Philip Morris International's net revenues. As of March 31, 2022, Philip Morris International's Russian operations had $1.4 billion in total assets.?

On March 24th, Philip Morris International announced steps it had taken to suspend planned investments and scale down its manufacturing operations in Russia, which included:

• the discontinuation of a number of cigarette products offered in the market (representing approximately one-quarter of the company's domestic cigarette SKUs, including Marlboro and Parliament SKUs) and the reduction of its manufacturing activities accordingly,
• the suspension of its marketing activities in the country,
• the cancellation of all product launches planned for 2022 in the market, including the launch of its flagship heated tobacco product IQOS ILUMA, originally planned for March 2022, and
• the cancellation of its plans to manufacture TEREA heated tobacco units for IQOS ILUMA in Russia (with an eventual annualized capacity of more than 20 billion units) and the related ongoing investment of $150 million.

Philip Morris International has stated that dividend remains top priority with unchanged policy and intends to grow dividend while reducing payout gradually over time to around 75%. It has also suspended its 3-year share repurchase program.