Philip Morris International (PM) is buying Rothman’s Canada for $2 billion. Rothmans’s sole asset is its 60% stake in RBH, the No. 2 tobacco company in Canada. (PMI already owns the other 40% of RBH). RBH has about a 33% share of the Canadian market.
Citi analyst Adam Spielman is not happy with the deal. He sees only small upside for the acquisition, but a great deal of risk:
Because PMI has a market cap of $109bn the deal is not material financially. However, it does increase PMI’s litigation exposure. In addition, we believe it will be next to impossible to bring PMI’s main brands to bear in Canada. (It cannot use the “Marlboro” name in Canada for example.)
Canadian litigation is the most threatening anywhere outside the US…
While the deal is small, we do recognise it will be accretive. RBH has grown EBIT at 6% compound, and it is possible that with synergies and improved anti-smuggling efforts from the government that growth rate could accelerate.
Despite the increased risk to PM, Spielman is not yet willing to change his estimates or recommendation.
Citi maintains BUY on Philip Morris (PM), target $64.
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