However it works out; somebody should be paying somebody a premium here.
Whether you feel they should or not isn't the issue. When MO & PM say they are pursuing a marriage of equals, what they mean is that they are NOT paying either side a premium. Instead all they are planning on doing is combining their two companies, and deciding on a fair ownership split of the combined company. The most likely is 59% for PM and 41% for MO, given that was the relative market caps of the two companies on 8/23. They can and might deviate from that slightly, but I stress the word slightly, as they need to avoid making this unacceptable to one side or the other. My assumption of "slightly" is plus or minus 1% of overall ownership, probably leaning towards slightly more ownership for MO.
certainly seems to spotlight some basic flaw in the concept, as many here and elsewhere have indicated.
There is no flaw in the general concept of a marriage of equals. But if you are going to do one, there needs to be some concrete reason for doing it. Chief among them would be that the combined company be able to generate more profit than the separate companies would have, by increasing sales, cutting costs, etc.
Therein lies the problem in this potential merger. While there are some qualitative benefits to merging, no one can lay out a realistic scenario where the two companies combined actually make more money together than they would separately. In fact, MO management argued just 11 years ago the exact opposite, that separating the two companies would lead to faster growth, which I was dubious of then as well. Sure, there are some minor things to increase profits that could be done (i.e. cutting one companies senior management), but that is likely chump change overall. Given the nature of the two companies and the industry they are in, the most likely scenario is that they would make nearly the same profit combined as they currently do separately.
So why then didn't the stock prices just stay close to where they were at on 8/23? I think that because without a positive reason for a merger, the market has assumed the merger is likely being considered to combat previously underestimated negative developments. A potential dividend reduction is part of that, but not completely. The reported comment that industry conditions are "tough" is another. The uncertain and heightened regulatory environment is another. Then there are just regular ongoing concerns like competition, RRP transition, strong dollar, etc.
If some of those negative issues are the real reasons for considering a potential merger now, it is likely that one or both companies is going to have to take actions to combat them even if they don't merge. If so, the market prices for MO & PM would have both come down eventually anyway. And if so, even if they decide not to merge, the share price declines are unlikely to reverse in the near term.