For Altria and Philip Morris International, it may have been too difficult to do anything about it.
A decade after going their separate ways, the two tobacco giants announced this week that they are considering a merger.
The potential merger would end years of speculation as to whether the companies would eventually reunite. Marlboro manufacturer Altria spun off PMI in 2008 to help the international business grow and protect it from US regulations and lawsuits.
If they recombine, the newly formed company would be a $ 200 billion deal trading, dwarfing the market value of its next-largest rival, British American Tobacco, by around $ 1
Only problem: Altria's two main sectors looking at growth – vaping and cannabis – are emerging fields that are challenged by regulatory challenges. Electronic cigarettes in particular have already been hindered by investigations, lawsuits and allegations of deliberately hooking underage children on addictive nicotine coatings.
Selling cigarettes is still an incredibly profitable business – albeit a shrinking business. Global smoking prices are declining when healthcare professionals across the globe hear alarms over the long-term health consequences. In response, tobacco companies are developing other ways to deliver less carcinogenic nicotine, including e-cigarettes, heated tobacco products, and oral-derived nicotine bags that do not release the toxins in tobacco known to cause cancer.
Merging Altria and PMI's businesses will allow the combined company, which already sells the same cigarette brands, to work together on new products, or at least that's the idea, according to people familiar with the company's thinking. The deal may not occur, the companies warned. And if that is achieved, the company's directors, shareholders and regulators will have to approve.
But Moody's analyst Roberto Pozzi said the combined company could use its booklet to invest in new products, generate more profits and better manage the risk that will come into new markets.
Marlboro Man fades
From 2013 to 2018, sales for cigarettes slipped by 9%, with 5.3 trillion cigarettes sold worldwide last year, according to data from market research firm Euromonitor International. But thanks to price increases, cigarette turnover sales increased by 15% in the period, to a total of $ 713.66 billion in 2018.
Consumers are dabbling in new products that promise to deliver a nicotine fix without any harm resulting from smoking. And some regulators embrace the shift. The US Food and Drug Administration recognizes that nicotine products exist in a so-called risk continuum, where cigarettes are the most harmful way to consume nicotine and other products, although they are still harmful, probably less risky.
E-cigarettes have so far been the most popular alternative. Between 2013 and 2018, global sales skyrocketed 324%, totaling $ 15.69 billion in 2018, according to Euromonitor. That's still just 2% of the total tobacco market of $ 814.3 billion, but with so much more potential room to grow than cigarettes.
Tobacco giants are noticing changing consumer tastes. PMI has carefully overhauled its image with a new mission: "designing a smoke-free future." Since 2008, PMI has invested more than $ 6 billion on iQOS, the heated tobacco machine and other next-generation products.
A man smokes with the electronic tobacco heater IQOS (I quit regular smoking) by tobacco company Philip Morris.  Sebastian Kahnert | image alliance | Getty Images
IQOS looks more like an iPhone than a tobacco product. The white holder contains the slim device, which heats a small piece of tobacco that PMI calls a "heat stick." PMI has introduced iQOS in 48 markets worldwide since the pilot run in Italy and Japan in 2014 and already has around 11 million users.
Reduced-risk products, as PMI calls them, are becoming a more important part of PMI's business. Last year, they made up about 14% of the company's total sales of $ 29.63 billion, up from 3% in 2016.
IQOS enters the US market next month after US regulators cleared it in April. Altria will pay royalties to PMI for selling the unit in the US as part of a licensing agreement signed by the companies in 2013. The US market was much less crowded when the scheme was announced.
An e-cigarette called Juul entered the scene in 2015 and quickly captured around half of the nicotine vaping market, according to Altria. The company's own e-cigarette brands, Mark Ten and Green Smoke, had captured a fraction of it and were shuttered in December – shortly before Altria announced its 35% stake in Juul for $ 12.8 billion.
An employee picks up a Juul Labs device kit for a customer in a store in San Francisco, California, Wednesday, June 26, 2019.
David Paul Morris | Bloomberg | Getty Images
As cigarette sales decline, much of Altria's future growth depends on risky efforts by cannabis, the success of winning iQOS customers, and the continued growth of Juul, which is under intense scrutiny. The FDA and other regulators have investigated the company's marketing practices with officials who blame a lot of the wave in the teenager as a weapon directly on the company.
Altria CEO Howard Willard has said that building a diverse portfolio will position Altria to succeed. Altria added oral derivative nicotine bag brand to its selection through a $ 372 million deal with Burger Sohne, announced in June.
In addition to its growing list of nicotine alternatives, Altria has a hand in the cannabis industry. Altria invested $ 1.8 billion in a 45% stake in Canadian cannabis company Cronos late last year.
"The combination of Philip Morris International's iQOS, the best-selling heated tobacco product, with Altria's shares in Juul, e-steam leader, and cannabis could result in a dominant portfolio tapping into key industrial growth opportunities in the future," the Euromonitor analyst Ivan Genov said in a statement.
A combined Altria and PMI would own a complete package of new products in a rapidly changing industry. But some are not so sure that companies need to merge, especially now.
PMI could give Juul what Altria cannot – help to grow internationally. But US regulators have still not approved Altria's investment in the e-cigarette company. Juul's headache in the United States is just growing. The FDA has threatened to pull Juul's products amid a teenage weapon "epidemic," lawsuits across the country accuse Juul of targeting children and lawmakers investigating the company in relation to marketing practices.
PMI will already profit from iQOS & # 39; sales in the United States thanks to the partnership agreement. Merging with Altria will expose PMI to the tumultuous US market, with regulators leading disruptive policies such as reducing nicotine levels in cigarettes to minimal or non-standard levels and prohibiting menthol cigarettes.
"It's just not clear to me what they can do together that they can't do individually, especially when working together on some of these things, like iQOS," said Piper Jaffray analyst Michael Lavery.
-CNBCs David Faber contributed to this report