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The Philip Morris International Operation Center.Denis Balibouse/Reuters

Swedish Match shares leapt to a record high on Tuesday after Marlboro-maker Philip Morris International Inc PM-N said it was in talks to buy the Stockholm-based company in a bet on the fast-growing market for cigarette alternatives.

The two companies confirmed media reports of the talks in separate statements after the Stockholm bourse closed on Monday, saying it was not certain an offer would be made.

Swedish Match makes most of its profit from Swedish-style snuff called “snus,” but its Zyn tobacco-free nicotine pouches are growing rapidly in Scandinavia and the United States.

The company, tipped as a takeover candidate for years, estimates the U.S. market for tobacco-free nicotine pouches doubled last year by volume, and that Zyn accounted for more than half of the market.

Its shares hit a record 97.42 Swedish crowns early Tuesday and were up about 25 per cent at 95.40 crowns by 1510 GMT, valuing the company at nearly $15-billion.

The Wall Street Journal (WSJ) reported on Monday, without identifying its sources, that a potential deal could be valued at $15-billion or more.

Several analysts said that might be too low to entice shareholders, and some did not rule out a counterbid, most likely from a peer that, like Philip Morris International (PMI), has little or no business in the United States.

“The implied multiple at this level doesn’t seem particularly demanding, in our view,” Bank of America analysts said in a note on the WSJ valuation.

Bronte Capital, which owns about 1 per cent of Swedish Match, said the figure undervalued the group.

Swedish Match’s Smokefree division, which includes snus and Zyn, accounted for around two-thirds of 2021 group sales – or 12 billion crowns ($1.2-billion) – with cigars accounting for a quarter.

“The acquisition of Swedish Match, if confirmed, would be extremely well aligned with PM’s strategic goals and would have a reasonably straightforward route to regulatory approval,” said Alastair Mankin, vice president at brokerage Cowen.

“This wouldn’t be the case for Altria and BATS, the two companies with the scale to compete.”

Shares in PMI, which is looking to expand its smoke-free options amid rising global scrutiny of traditional cigarettes, opened higher but were down 0.8 per cent by mid-morning in New York.

“Strategically, we think this makes a lot of sense,” Jefferies analysts said in a note to clients. “It would give PMI a leading position in European smokeless, while critically, also giving distribution in the U.S. for its own broader RRP (reduced-risk products) rollout.”

Swedish Match in March paused plans to spin off and list its cigar business. Its products also include chewing tobacco, U.S.-style moist snuff, matches and lighters.

In the United States, Swedish Match is the biggest player in the nicotine pouch and chewing tobacco markets, according to its website, and No. 3 in moist snuff. In Scandinavia, it is market leader for snus products and No. 2 for nicotine pouches.

SEB analysts said rivals BAT, Altria and Japan Tobacco, or an investment firm, could be interested in buying Swedish Match, or parts of it.

Bernstein analysts cut their rating on Altria on Tuesday, saying a PMI deal for Swedish Match world reduce the chance of Altria dominating the U.S market for next-generation smoking products. Shares in Altria fell 7 per cent.

Swedish Match estimates the Scandinavian smokeless tobacco market totalled more than 400 million cans last year, and the nicotine pouch market around 100 million. It estimates the U.S. market totalled 50-60 million and 300 million, respectively.

A sale of its cigars division would see Swedish Match exit combustible tobacco products, having sold its cigarette business in 1999.

Researchers debate the health effects of snus, with some studies indicating its use may increase the risk of cancer.

Snus is banned in the European Union, except for Sweden.

Swedish Match in recent years has unsuccessfully challenged the ban saying snus is safer than cigarettes. In the United States, the Food and Drug Administration in 2019 approved the marketing of snus as less harmful than cigarettes.

Swedish Match is due to report first-quarter results on Wednesday.

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