Shares of Altria Group (NYSE:MO) were up 6.7% as of 11:05 a.m. EDT on Tuesday, while shares of Philip Morris International (NYSE:PM) were down by 9.8%. The opposite moves for these tobacco stocks came after the companies confirmed that they're in discussions about a potential "merger of equals."
No details of the potential transaction have yet been announced by either company. But investors appear to be making the assumption that Altria will be the winner in any deal. That's probably fair.
Although Altria and Philip Morris are stating publicly that they're talking about a "merger of equals," the companies haven't achieved equal results recently. Philip Morris stock had soared nearly 22% year to date prior to this week, but Altria's shares were down by 6%.
When there's talk about combining a company that's flying high with a company that isn't, the high-flyer tends to be dragged down closer to the earth while the laggard gets a lift. That's exactly what we're seeing happen with the confirmation of talks between Altria and Philip Morris.
However, a merger does make a lot of sense. Altria spun off Philip Morris in 2008, but their businesses remain very similar. The two companies are already close partners as well, with Altria marketing Philip Morris' IQOS heated electronic cigarette in the U.S.
It's now a waiting game to see if the discussions between Altria and Philip Morris go anywhere. The companies warned that "there can be no assurance that any agreement or transaction will result from these discussions."
Even if Altria and Philip Morris do reach a deal, there are several other hurdles to jump. Shareholders of both companies would have to vote in favor of a merger. Regulators would also have to give the green light to any deal. The bottom line is that there's a long way to go before Altria and Philip Morris could potentially be reunited.