By Richa Naidu

LONDON (Reuters), -Philip Morris International’s £16 billion offer for Swedish Match, a smaller competitor to its larger rival, highlights how urgent it is for cigarette manufacturers to find new alternatives.

Marlboro producer Philip Morris (NYSE.) purchased Swedish Match on Wednesday, making it one of the most important makers of oral nicotine product. Snus, a chewed tobacco product that the company claims is safer than smoking, and Zyn nicotine pouches are both available. They can be used in the same manner as tobacco but they do not contain any tobacco.

They are each niche products that are growing. Swedish Match holds almost 50% of the global market for tobacco-free oral nicotine. This puts it ahead of both British American Tobacco (NYSE Altria Group (NYSE:) In this category.

Thomas Russo, managing partner at Gardner Russo & Gardner which owns shares in both Philip Morris (PMI) and Swedish Match, welcomed the tie-up as opening a “new field” for PMI’s smoke-free products, which include iQOS tobacco heating devices.

“It would continue the industry consolidation that has been occurring for over ten years,” he stated.

According to Refinitiv data, Russo’s U.S. Investment firm holds a 0.47% share in PMI as well as a holding of Swedish Match worth 0.09%.

Over the last decade, the tobacco industry has struggled to find new markets. As more people stop smoking because of health concerns, regulators have cracked down on cigarettes.

Snus is a Swedish-style, moist tobacco product. Euromonitor data shows that the global snus market has grown from approximately 7,000 tonnes in 2008, to close to 10,000 tonnes in 2019.

U.S. Food and Drug Administration endorsed the promotion of Swedish Match Snus, which is less harmful than cigarettes in 2019.

DEALMAKING

PMI-Swedish Match, the possible PMI deal, is just one in a long line of investments that the tobacco industry has made in products with lower risks. These include e-cigarettes as well as tobacco heating devices.

Euromonitor has estimated that there will be a $67 billion global market in 2021 for e-vapour and smokeless tobacco. That’s nearly three times as much than it was in 2016.

Jacek Olczak, Chief Executive of PMI, stated last year that his company has spent over $8 billion on products with lower risk since its inception a decade ago.

The PMI’s 2025 goal of 50% from non-smoking products would be achieved by growing the existing business and not through acquisitions, he stated.

Callum Elliot from Bernstein said that purchasing Swedish Match would still give PMI (which was spun off in 2008 by Altria) a well-established U.S. distribution and market.

Elliot said that the deal had not yet been finalized. I imagine Swedish Match could appeal to other industry players, so we don’t expect to see any counter-bids from any other companies. Japan Tobacco (OTC:) Inc.”

Japan Tobacco spokesperson stated that they do not comment on speculations and rumours.

COMPETITION

PMI is the 3rd largest cigarette maker in 2020.

Altria shares fell 9% Tuesday after news of the Swedish Match move. Investors were concerned about increased competition from American companies.

Altria acquired a 35% interest in Juul Labs Inc. for $12.8 million. A year later, it bought 80% of Burger Söhne Holding AG, allowing it to distribute the Swiss company’s On! oral nicotine pouches.

Others are also watching closely.

Kingsley Wheaton (BAT chief marketing officer) stated that a multicategory strategy with nicotine and tobacco was the most effective. He spoke to Reuters Tuesday.

BAT ranks second in the market for tobacco-free, non-tariff nicotine products worldwide behind Swedish Match. Thanks to its ecigarettes and other oral nicotine products, sales at the “new category” division increased 51% last year to 2.05 billion pounds ($2.52billion).

London-listed Company aims for division revenues in excess of 5 Billion Pounds and profitability by 2025.

Wheaton explained that as our business evolves, so will our portfolio. And, with it, the landscape of our competition.

PMI pursues Swedish Match while other competitors prefer it all alone.

According to a spokesperson, Imperial Brands (OTC) is now focusing its efforts on the development of products for the European heated tobacco market.

However, there are still many things to do.

According to the spokesperson, “The entire next-generation product market is still quite new – nobody in the industry yet has ever created any product that really, fully reproduces the experience of smoking a cigarette or a traditional tobacco cigarette.”

($1 = 0.8131 pounds)