Altria’s Cigarette Addiction Is Becoming Unhealthier

For years tobacco companies have been fighting regulators more than each other. That might be about to change, and Altria MO -0.61%

in particular needs a game plan.

If Philip Morris International‘s

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$16 billion offer for oral nicotine pouch maker Swedish Match is accepted, US cigarette makers will suddenly have a nimble new competitor. Soon after it was spun out of Marlboro co-owner Altria in 2008 to focus on overseas markets, a slowdown in international cigarette volume forced Philip Morris to innovate in smokeless products. Since 2014, the company has built IQOS from scratch—a noncombustible heated-tobacco brand that now generates $9 billion in annual revenue.

Based on its own estimate, Philip Morris has captured 59% of the global market for smokeless products, excluding the US and China. Now it is eyeing America. A takeover of Swedish Match gives Philip Morris a US distribution network and a leading position in oral nicotine pouches.

The deal is a wake-up call for Altria, which has a weaker smoke-free portfolio. Marlboro had 43% of the US retail cigarette market in 2021, but the company has a lower cut of the market for so-called reduced-risk products. Its main interests include a 35% stake in the controversial vape company JUUL Labs as well as its on! oral nicotine pouches. In addition, the number of traditional cigarettes sold is under pressure in the US, as higher gasoline prices force some smokers to cut back.

Altria could sell its roughly $10 billion stake in Budweiser brewer Anheuser-Busch InBev BUD -0.23%

and use the cash to buy the rest of JUUL. First, though, the vaping brand needs to get approval from the US Food and Drug Administration to stay on the market. The regulator is currently reviewing all e-cigarette brands after a vaping health scare.

Convincing investors that a full takeover of JUUL is a good idea that would be another challenge. Altria overpaid for the initial stake and values ​​it at just $1.7 billion, down from a purchase price of $12.8 billion in late 2018. JUUL’s internal valuation is a lot higher. To obtain full control, Altria would probably have to pay another $7.5 billion, Jefferies estimates.

Altria could also create its own smoke-free products, but its record is weak. Earlier this year, management said that the company is working on new in-house brands. It recently paid about $100 million for the intellectual property of heated-tobacco company PODA.

Slowing Philip Morris down could buy Altria some time. The US company has an exclusive licensing agreement with its old subsidiary to distribute IQOS in the American market. The contract is valid until April 2024, when it automatically rolls over for another five years if certain milestones are met. If Altria can hang on to the contract until 2029, it gets the benefits of IQOS sales and some control over how quickly the product cannibalizes traditional cigarettes.

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Now that Philip Morris is moving to buy Swedish Match’s distribution network, though, it probably wants to go it alone to capture the full benefit of US IQOS sales rather than just collecting a royalty fee from Altria. The two companies are in dispute over whether targets to extend the contract have been met. Altria’s US rollout of IQOS is on hold because of a patent dispute with British American Tobacco.

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When news broke of talks between Philip Morris and Swedish Match, Altria shares fell nearly 10%. They have gained most of this back as investors pile into value stocks with high dividend yields. Shareholders shouldn’t mistake that as a sign that the pressure on the company is lifting. The Marlboro man needs to play defense, and without repeating the mistakes made with JUUL.

Write to Carol Ryan at carol.ryan@wsj.com

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