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A cigarette smoking robotic tester machine is seen at the Czech Republic-based subsidiary of cigarette-maker Philip Morris International Inc. in Kutna Hora in this 2012 file photo.PETR JOSEK/Reuters

Philip Morris International Inc. had a disappointing earnings report Tuesday – sales volume was down and the strong U.S. dollar continued to prove painful. But buried deep within the report was a bright spot that happens to be the key reason Altria Group Inc., its former parent company, might want the business back:

"A highlight of the quarter was our exceptional iQOS performance in Japan, where HeatSticks reached a national share for the quarter of 2.2 per cent, demonstrating the tremendous potential of the reduced-risk products category."

What is iQOS? In a nutshell, it's a new smoking technology that involves heating tobacco rather than burning it – something that Philip Morris International is hoping to claim reduces the risk of smoking-related diseases and will reignite its growth. As of now, the technology looks to be a real game-changer for the industry, and Philip Morris International has that first-mover advantage. The company says it's spent more than $2-billion (U.S.) on research and development of smoking alternatives, as conventional cigarette consumption wanes in many markets.

Altria has a hand in the iQOS system because it has a partnership with Philip Morris International for coming up with these new products. However, the two are separate companies. They split apart in 2008, leaving Altria focused on the U.S. market, where it has tremendous pricing power but is losing smokers. They've launched iQOS products abroad, though, which is Philip Morris International's territory. And they're having success there.

This builds on the argument that the two should recombine officially, instead of just sharing R&D. While cigarettes remain a massive $700-billion global industry, these reduced-risk products look to be the tobacco giants' best chance at driving future sales. And even though marijuana could well be another growth area, it's still years away from becoming a legitimate industry that companies like Altria can move in on.

A hypothetical takeover of Philip Morris International, valued at $154-billion, would certainly set the M&A record this year. But it's not crazy to think Altria could do it. Altria owns about 27 per cent of SABMiller, the $94-billion brewer that's now in the (long and gruelling) process of being sold to Anheuser-Busch InBev. There are tax implications and whatnot, but simply put, Altria would have the wherewithal to pursue Philip Morris International. And with low interest rates, low leverage and sustainable cash flow, borrowing funds wouldn't be a problem either.

Tara Lachapelle is a columnist with Bloomberg News

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