The return of nicotine bags will take time to arrive at Philip Morris

acek Olczak is going to spend big to give up cigarettes. The CEO of Philip Morris International has agreed to the $16 billion acquisition of nicotine bag (snus) manufacturer Swedish Match. With this deal, the Marlboro producer is closer to quitting by 2025. But the financial return could take much longer.

PMI plans to earn more than half of its net revenue from products such as the Iqos heated tobacco device and the Veev vaping product within three years. Swedish Match, which runs most of its sales on products like Zyn nicotine sachets and chewing tobacco, considered far less of a health risk than smoking, will help.

And more importantly, it also brings PMI back to the United States. The group, valued at 153 billion dollars, distributes tobacco products there through Altria, from which it was spun off in 2008. Swedish Match, which has two-thirds of the market share of nicotine bags in the United States and obtains There nearly 60% of its revenue from smoke-free products would give PMI a distribution network to sell items like Veep vapers.

However, the premium of almost 40% is expensive. The deal values ​​Swedish Match at $17.5 billion, including net debt. To recoup the Swedish group’s cost of capital of around 7% – a low threshold compared to the tobacco sector in general – some $1.6bn of annual pre-tax operating profit would be needed. To reach that figure in 2027, a long wait, PMI would have to grow the Swedish group’s ebit by 10% annually and cut costs equivalent to 10% of 2021 revenue, according to our calculations. That sounds tough: Analysts expect sales to grow 7% on average over the next three years, according to Refinitiv data.

PMI is doing the right thing by diversifying the types of products it offers. However, venturing into new untried areas in some markets carries risks. PMI learned this the hard way when, along with Altria, it lost a patent infringement case over Iqos heated tobacco devices.

In addition, regulators could also take a dim view of snus nicotine pouches, as the United States has done with flavored vapers, for example. The price Olczak will pay leaves little room for error.