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Philip Morris raises Sweden Match bid to $15.7 billion

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Philip Morris International has increased its bid for the Sweden Match by almost 10 percent, bowing to pressure from activist hedge funds in a last-ditch effort to complete its takeover of the smokeless tobacco specialist.

PMI, best known for selling Marlboro outside of the US, on Thursday raised its bid from Skr 106 to Skr 116 per share, valuing the target’s equity at around SKr 176 billion ($15.7 billion). PMI CEO Jacek Olczak emphasized that this is the company’s “best and ultimate price”.

The latest offering represents a victory for a group of hedge funds led by Elliott Management, which has built shares in the Sweden Match since the initial offering – Elliott is now the company’s largest shareholder at 7.25 percent.

To complete the transaction, PMI must obtain approval from Swedish Match shareholders, who own at least 90 percent of the stake, by November 4.

Separately, PMI on Wednesday agreed to pay approximately $2.7 billion to tobacco group Altria for US commercialization rights for IQOS, an e-cigarette series, and gave full global rights to the products.

“If the proposal fails, we are prepared to move forward autonomously to develop IQOS and the rest of our smokeless portfolio in the US,” Olczak said.

Australian fund manager John Hempton, in which Bronte Capital owns about 1 percent of Sweden Match’s stake, told the Financial Times he does not believe PMI will reach the 90 percent threshold for shareholder acceptance.

He said he was unlikely to tender his shares and that the success of the deal “it all depends on Elliott”.

Elliott declined to comment.

Swedish Match produces snus, a popular tobacco product in Scandinavia, as well as oral nicotine sachets, the fastest growing category of alternative nicotine.

The Swedish Match deal will unlock a critical entry point into the US market for smokeless nicotine products for PMI, which has not had a significant US presence since splitting from Altria a decade ago. Talks to reunite the two companies collapsed three years ago.

PMI also plans to leverage Swedish Match’s retail distribution channels to bring its newly acquired IQOS range to the US.

If the 90 percent acceptance of the deal seems unlikely, PMI could lower that threshold, but under Swedish law this would limit the ability to fully control and integrate the Swedish Match.

Mark Kelly, a broker at Cowen, said PMI would likely need to lower the 90 percent threshold even if Elliott were to go out to bid, given the difficulty of besieging all of its shareholders, especially retail investors and index funds.

“PMI has always expected it to drop below 90 percent, but in this case, if they just cut a few percent off, they have a way of getting more acceptance and eventually squeezing the minority,” Kelly said. “There is a lot of precedent for this with comparable transactions in Sweden.”

Olczak said the new price “primarily reflects high net worth in PMI. . . Currency movements since the announcement of the first offer in May”. The strong performance of the US dollar in recent months means that PMI will incur limited extra costs from the improved offer.

Olczak, who took over PMI last year, accelerated the company’s move away from smoking, but his promise to “stop smoking the world” was met with skepticism.

In the nine months through September 30, smoke-free products accounted for 30.4 percent of the group’s total revenues, up 14.2 percent year on year, according to a filing Thursday.

BlackRock and Vanguard, the second and third largest shareholders, also declined to comment.

Swedish Match’s share price rose almost 2 percent to SKr 112 in afternoon trading in Stockholm in response to the renewed offer. PMI shares fell 1.6 percent in midday trading in New York.