With news of more consolidation in the tobacco space, Jim Cramer thinks it is time for a shake-up at some of the biggest tobacco companies.
This was just one of the latest moves in a long wave of consolidation that has hit the tobacco industry, as Reynolds American acquired Lorillard for $25 billion over a year ago. The news of British American gave Cramer an epiphany.
"With British American and Reynolds combining forces, they will finally have the scale to really challenge Philip Morris," the "Mad Money" host said.
This is why Cramer thinks Philip Morris needs to try to get back together with Altria to make it untouchable.
Back in 2008, Altria — formerly known as Philip Morris — broke itself into two companies. Altria kept the domestic tobacco business and then spun off its overseas business into Philip Morris International. While the breakup did unlock tremendous value for shareholders, Cramer says the need for Philip Morris to merge with Altria has never been more urgent.
Anti-smoking laws make it difficult for tobacco companies to advertise and gain market share. Thus, what matters most in this industry is scale, to allow more pricing power with suppliers and customers.
Donald Trump's platform of deregulation has also prompted tobacco to become more attractive as well, Cramer said. And if the deal happens, it's going to be expensive, as Philip Morris's $140 billion market capitalization is not much larger than Altria's $131 billion. Since Philip Morris only has $5 billion in cash on its balance sheet, it would need to borrow money or sell Altria on an all-stock transaction.
"Even with a greatly-expanded debt load, I think this merger would be worth it … the way to play this story is by picking up some Altria," Cramer said.
British American expects at least $400 million in annualized synergies by the third year after the Reynolds deal closes. A Philip Morris-Altria combination could save even more.
So, with the tobacco industry getting smaller every year, Cramer fears Philip Morris' dominance will be challenged. The break-up of Philip Morris and Altria did wonders for shareholders, but a reunion could be even more lucrative.