Swedish Match: Good Q1, But Upside Capped By Philip Morris Offer

(Preview) Company Update (SWMA SS) (Downgrade to Neutral)

Summary

• We are downgrading our rating on Swedish Match as its shares now trade at just 5% below the SEK 106 offer from Philip Morris.

• We believe the offer undervalues Swedish Match's multi-bagger potential, but it has effectively been accepted by Swedish Match's board.

• Q1 results this week showed Swedish Match's strong growth continuing, with ZYN growing its volume by 35% and gaining share in the U.S.

• Other trade buyers are precluded by anti-trust or financial issues. Few private equity deals are large enough to launch a rival bid.

• There is a small possibility the bid will be raised, as 90% acceptance among shareholders is required, but we expect the offer to be accepted.

Introduction

We are downgrading our rating on Swedish Match AB (referred here as "SWMA") from Buy to Hold. Shares have jumped 33% since May 9, when takeover discussions with Philip Morris were disclosed, and now trade at just 5% below the SEK 106 offer accepted by the Board.

We initiated our Buy rating on SWMA in September 2…