Altria-Philip Morris Tie-Up: Positives and Negatives

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Even though shares of both Atria (MO) - Get Report and Philip Morris (PM) - Get Report were moving down on Tuesday as news broke that the two want to merge, some positives could work for shareholders of both companies should the deal close. 

Altria shares were falling 4% and Philip Morris shares were falling 7%. 

Before we get into positives and negatives of the deal, here's a quick refresher. 

The News 

Altria and Phllip Morris confirmed they're considering a merger of equals, in which, according to a person familiar with the matter, Altria shareholders would get 41% of the combined company and Philip Morris holders 59%. 

The deal would create a global tobacco giant worth roughly $200 billion. 

The Positives

While investors are signaling they might prefer to hold the entirety of their respective companies on a stand-alone basis over holding less equity of a combined entity, there are some reasons for bullishness on the combination. And those reasons seem evenly distributed for shareholders of both sides. 

For Altria, shareholders could enjoy a less debt-laden capital structure, as CFRA analyst Garrett Nelson pointed out. "We think MO was facing challenges from the $14.6B of debt taken on from the purchase of equity stakes in Juul (35%) and cannabis firm Cronos Group (45%)," Nelson wrote in a note Tuesday. 

To Nelson's point, 27% of Altria's capital structure is debt, as its market capitalization is $84 billion, compared with its total enterprise value of $115 billion. But Philip Morris' debt relative to its enterprise value isn't more than a few percentage points below Altria's level, at 24.8%. 

For Philip Morris, "PM's motive for the merger is largely to leverage these two investments and focus on growth of vaping/cannabis products in non-U.S. markets," Nelson said. TheStreet's Jim Cramer said early Tuesday: "Combined, you're making a bet on the smokeless future." Juul products are smokeless.

The Negatives

The majority of revenue in the combined company would still come from traditional cigarette sales, which have declined in the face of the smokeless trend. 

Also, it isn't yet clear the combined company would have the expertise to make competitive smokeless products, although Philip Morris has indeed begun making them, including the IQOS, which is a non-combustible tobacco cigarette.