David Faber on CNBC gave an update on the potential MO/PM merger. He states from talking to insiders:
- Talks continue to make progress. No deal likely this week, but likely one announced soon.
- Economic issues largely agreed to. Social issues (i.e. where HQ will be, etc.) remain, but probably can be resolved.
- Marriage of equals still most likely scenario at near 59/41 ownership split.
- The main driver of the merger is a "window of opportunity" to drive the introduction of next generation products. Merger announcement likely to stress R&D and product innovations.
- Current percentage of shareholders that own both MO & PM is nearly 70%.
- Approval of any merger would require vote from both MO and PM shareholders. Might need 50% or 2/3 of the vote, depending on structure of merger.
The modest dividend increase this morning by PM was largely what was expected. I continue to believe that MO shares are likely to be converted to PM shares, probably receiving close to .57 shares of PM for every 1 share of MO. I then doubt the PM dividend will be further increased, resulting in a overall decrease in dividend dollars paid by the elimination of the MO shares ($6.3 billion currently paid, down to $5.0 billion after conversion to PM). That will be the pool of real dollars ($1.3 billion annually) retained that PM can then use to fund the R&D, innovation, acquisitions, etc. they believe they need to do.
Those actions and a merger might well be the wisest course of action to take in a changing nicotine user market. And given they start with a modest stock price; if you assume MO/PM is ultimately the most successful company in the space, the shareholder returns over time could be very good. But the fight to determine that will probably be more expensive and take more time. And the outcome is obviously less certain than when the product was just cigarettes.