Swedish Match: Many Moving Parts Around Philip Morris Offer, But Limited Near-Term Upside

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

Summary

• Philip Morris has again extended the acceptance period on its offer, and Swedish Match shares have risen 3% above their SEK 106 offer.

• We believe the current offer will fail, as three investors opposed to the offer have effectively reached the 10% needed to block it.

• Philip Morris' ability to pay more is limited by the commitment to its dividend and leverage, and new ways to enter the U.S. now exist.

• The most likely outcomes are either a limited increase in the offer, or Philip Morris walking away and shares falling significantly.

• Philip Morris' offer undervalued Swedish Match, but we see limited upside in the near term or a more attractive entry point. Avoid.

Introduction

We review our Hold rating on Swedish Match AB (referred here as "SWMA") after Philip Morris extended the acceptance period for its tender offer again to November 4.

We downgraded our rating on SWMA from Buy to Hold in May, after the share price rose to SEK 100.95 following the SEK 106 per share offer from PM. Since …