Anyone who remembers the break-up of Kraft into a tired old North American group of pantry brands and a tired old international group of snacks found themselves scratching their heads if this was the best they could do to bring out value.
Same thing with the break-up of Philip Morris into Altria (MO) , the slow-growing, high-yielding tobacco company and Philip Morris (PM) , the namesake company which was supposed to be the faster-growing, lower-yielding entity. Ironically, because of currency and because of the demand for larger dividends in this country, Altria gives you a 3.6% yield while Philip Morris now yields 4.55%.
Now the talk is about recombining not one, but both of them. Remember Kraft merged with Heinz to give you Kraft Heinz (KHC) , which his another slow-growing, pantry-based company that was meant to give you a high yield. But because people like the franchise and the cost-cutting that goes with it so much, it yields only 2.77%. More importantly, the stock, which is owned by charity portfolio Action Alerts PLUS, has been rallying because of talk that it will buy back Mondelez (MDLZ) . Amazingly, Kraft-Heinz has jumped more than Mondelez on the rumor.
I know that the split left Kraft without the growth it needs, and I know that the Heinz people who are running the show don't really care whether they were together before. It wasn't their idea. I think the idea makes a ton of sense.
Plus, I always thought that Mondelez would make a terrific acquisition for Coca Cola (KO) , which is way too reliant on beverages. A Mondelez merger would give Coca Cola the same profile as PepsiCo (PEP) , which is a much more revered company for its growth these days vs. Coca Cola. Mondelez has a market cap of about $70 billion vs. Coke's $180 billion, so it could happen, especially given Coke's balance sheet, now that a new CEO is coming into the company. But there's been no sign whatsoever that the new CEO is going to deviate from Muhtar Kent's decision to not pursue the snack entity.
As hot at that re-merger sounds, I was shocked when Wells Fargo put out a piece of research yesterday entitled "Probability of PM/MO Combo Now Higher."
Excuse me for not knowing that this merger idea was even in the hopper, but apparently it is even hotter than the KHC-MDLZ talk.
The timing of the deal, according to Wells, "could be sooner rather than later", because it would be "accretive in year one, with PM paying up to $77 a share for MO." The stock went out at $67 last night. Wells is even giving you a percentage that the deal will occur: "a 70% probability within the next 6-12 months."
What's really driving this combination? A revolutionary device of PM's called the iQOS, which is going to change smokeless cigarettes forever -- at least according to Wells. "Ultimately, we believe iQOS has the potential to usher in a new public ethos and disposition toward smoking, aligning PM with on trend aspirations for healthier living and the way smokers feel about themselves as smokers, effectively redefining the smoking experience."
The thinking is that this breakthrough is so big that it needs the U.S. market to really take off. That, plus the corporate tax reform and a possible rise in interest rates, necessitates the deal to be done now. It makes sense, when you consider all of the consolidation in tobacco.
On a discounted cash flow basis, Wells thinks that iQOS could add $26 a share to PM and $10 to Altria.
Anyway, I have no idea if either deal is going to happen. But I do know this. These two potentially blockbuster deals will create still one more wave of M&A, simply because the combinations make so much sense and are so obvious that they beckon to be done.