Labour Party vs Philip Morris
This blogpost is from our regular newsletter, Political Risk for the C-Suite, which explores political risk as it plays out in the week's news. You can sign up here.
Let's say you're the CEO of a big international tobacco firm.
You probably took the job with some foreboding and moral questions. It was one thing to sell this stuff 50 years ago when the science was hazier, or even 20 years ago when it was common in every pub in the land.
But now? Tobacco firms do not sit well in a time of lung-crippling coronaviruses.
I assume that your reasoning has to be that you can guide the firm to turn over a new leaf, as it were. You develop a new strategy, making use of new technologies like vaping, to declare a 'smoke-free future' in which you'll be a 'healthcare and wellness' company, rather than the Microsoft of addiction and cancer.
This is also an easier sell to shareholders than it used to be, because there's a global decline in cigarette sales and an obvious trend in favour of healthcare.
You show your intent by acquiring a MedTech firm that aims to combat lung diseases.
You expect that politicians might see the good in this.
That's the situation for the tobacconist Philip Morris International (PMI), which last week announced plans to acquire the UK's Vectura, whose technology improves the efficacy of inhalers.
Unfortunately, not all politicians are convinced. In particular, the UK's Labour Party is calling on the health and business secretaries to block the deal.
"If [PMI are] really serious about making amends," says the Shadow Health Secretary Jon Ashworth, "they should be investing their millions in helping people stop smoking, rather than trying to profit on the results of smoking."
You can see the decency behind Labour's position, but it presents three big questions that anyone in political risk should ask:
1. On what grounds would Ministers intervene in this acquisition?
Given that the US private equity group Carlyle had previously put together a deal with Vectura before PMI pounced, why should it be blocked now that the suitor is less palatable?
Though there are 'public interest' powers in UK merger control, these have been rarely used and focused on national security, financial stability, media plurality and competition law. The Government has recently added a new layer of security-based merger control similar to the USA's CFIUS regime, but the rhetoric has been far from tub-thumping. That's because Ministers don't want to be drawn into every merger and acquisition on the table, especially amid the current glut of activity.
With salvos on the PMI deal, is Labour opening a new, moral dimension in UK merger control? If not, what are the grounds to block it? If they are, that leads to my second question.
2. Should a leopard not change its spots?
If Big Tobacco, seeing the writing on the wall, wants to start shifting capital into non-tobacco, isn't that a reasonable thing to do?
A fair response to the question is scepticism: PMI plans to build $1 billion revenue from "beyond tobacco and nicotine" products by 2025. But that accounts for 0.65% of current revenues. It would need another four or five Vecturas to do that, but it's hardly tectonic. Is this really a 'smoke-free future'?
However, Ashworth's challenge is to "spend their millions in helping people to stop smoking". PMI can claim to be doing precisely that, with 30% of revenues now coming from a vaping device. And it isn't "millions," Jon... Something is certainly changing.
Another sceptical response comes from a Conservative, Bob Blackman MP, who thinks PMI will use its investment in Vectura as a lobbying vehicle. I think that's a very credible point, and UK lobbying rules are definitely not up to the job of policing such overlaps.
The obvious analogue is Big Oil. The leaders of both industries must balance legacies, shareholder interests and public (and political, and regulatory) expectations. Should oil firms be prevented from buying renewable energy firms? That would exclude some of the world's largest investors in green tech. Yet this also does give them a seat at the table. Which leads us on to question number three.
3. Who should police transition plans?
If you're a shareholder in a major oil or tobacco firm, then you face a problem of transition. You want to make money, but you also see the writing on the wall for tobacco and at the very least you want to diversify away from it, if not exit altogether.
If you're a Minister, then you face a similar problem because you want to look out for shareholder interests in the broadest sense, but you also want to see progress on public policy issues, such as health. So you don't want to intervene with a morality check on every merger or acquisition, but you do want the market to produce the right results. You prefer to do this by sending signals to the market.
But what signals? And what if investors don't respond, because there's massive inertia in institutional investment and many fiduciary rules are, in fact, written to ignore such non-financial questions?
Among environmental lobbies, there is a drive to push big companies to adopt Paris-aligned transition plans (i.e. aligned with the Paris Climate Agreement's targets). The more strident NGOs would like to put governments in control of assessing these transition plans, whereas more mainstream campaigners say they should be in the purview of investors. Either way, it's a shift in shareholder norms towards activism.
In tobacco world, there is no Paris Agreement. But there is a 'smoke-free future', which apparently PMI shareholders already support. There is also a world in which Ministers need not constantly intervene in M&A, but can set an expectation that shareholders and their appointees will do the right thing. That world is known as governance, or the G in ESG.
So question number three is really: where should political intervention end and governance expectations begin? Or, what duty do company officers have to reflect societal expectations, and what duty to serve shareholders' expectations of profit? And how should shareholders display those expectations? These are the topics for many more newsletters, but it looks like Labour has already decided, in this case at least.
This must be my first piece of writing somewhat in defence of a tobacco company, but hey ho. Political risk seems like it's all about norms and mainstreams, but in fact the rules are often written at the margins where it's precarious to tread.
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