Tuesday, May 10, 2022

Swedish Match: how not to behave when you are kissed on the dick by a rainbow

There are confirmed rumours that Swedish Match, a Swedish company focussed on oral nicotine delivery (snus, chewing tobacco and most importantly "modern oral") is in advanced merger talks with Philip Morris.

I am furious.

Swedish Match is about a ten percent position for my fund - and a core holding. We own about 1 percent of the company. 

The management lucked-in when they came up with what is in my opinion the best nicotine product ever invented and hence founded the whole category of "modern oral". The product gives maximum nicotine hit (think supercharged coffee) with substantially lower health risks. It is however extremely addictive.

As a dirty capitalist out to make money for my clients this is a nirvana. A product that attacks an enormous brand-loyal and addictive market with a superior product. 

Oh, and did I mention the product has strongish patent protections?

This is the stock in the portfolio I have the most hope for the future.

Here is the Swedish Match shipment volumes for Zyn from the last results presentation.

It is a pretty good growth stock and the runway is tremendous.

And it is massively cash generating.

Okay, that is all wonderful. But the management is not. 

I do not normally want to talk negatively about the management of one of my core investments, but this time I am furious.

To be blunt the management might be kindly called dull plodders.

When riding this Zyn tiger they proudly talked about their capital management because all their plants were running at 100 percent capacity. Sure they couldn't supply (hence addict) all the customers who wanted their product, but look at that capital management...

But the plodding management do not stop there. Swedish Match own the biggest lighter and match business in the world. It is not much of a business, returns are merely okay, and volume falls every year because most match volume is driven by (ever falling) cigarette consumption.

But hey, this business has a distribution channel into almost everywhere in the world where cigarettes are sold. Pair that with a decent vape product and you would immediately have one of the world's biggest vape business. I wrote about that opportunity here.

Anyway this utterly unimaginative management team look like they are just going to take the bid from Philip Morris and I am disgusted.

I gave a florid quote to the Wall Street Journal expressing my feelings:

The management team are uninspiring utility execs whose dick got kissed by a rainbow. They are busy selling the rainbow.

They should all be fired for considering this deal.

We own 15.1 million shares.

Anyway, if there is a bid there should be an overbid. I think you can make a PE deal work to 175 (deal looks to be about 100).

And to help you out I have attached a note I wrote a few years ago explaining our Swedish Match position. Enjoy.

And if other angry shareholders want to talk my DMs are open on twitter.


Swedish Match takeover rumours

There is an article just out that Swedish Match is in advanced merger talks with Philip Morris at a price of about USD15 billion.

At Bronte we own 15.1 million shares in Swedish Match - or about 1 percent of the company.

We believe the future for Swedish Match is considerably better than the price reflected and we are not happy with this offer.

We will consider our future actions.

John Hempton

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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.