A takeover of Altria Group (MO) by Philip Morris (PM) is "fairly unlikely," Citi believes. The call appears to be contrarian, as Bloomberg reported earlier this month that Altria was mentioned as the most likely takeover target in the U.S. this coming year in a survey of 17 M&A/event-driven desks, equity analysts and fund managers. Altria Group primarily sell cigarettes in the U.S., while Philip Morris focuses on selling cigarettes in other countries.

REASONS FOR SKEPTICISM: Philip Morris shareholders would only own 58% of Altria Group following a takeover, wrote Citi analyst Adam Spielman. Moreover, Philip Morris' smokeless cigarettes, known as iQOS, would cannibalize Altria's business, Spielman believes. Furthermore, investors can currently choose between Altria and Philip Morris, based on the amount of foreign exchange risk they want, but combining the companies would eliminate their ability to make such a choice, Spielman believes. Finally, the acquisition would either be neutral or negative for Philip Morris' profits, and it's unknown when iQOS will be approved, making the deal "risky" for Philip Morris, according to Spielman.

WELLS ON OTHER SIDE: After British American Tobacco (BTI) announced a deal on January 17 to acquire the remainder of Reynolds American (RAI) it doesn't yet own with a sweetened $49B offer, Wells Fargo's Bonnie Herzog argued that the creation of the world's largest tobacco company could spur Philip Morris to launch its own bid for Altria as the industry races to scale up. Herzog added that she doesn't expect Philip Morris to "sit idly by" as British American becomes the world's largest tobacco player, and she notes that the 16-times takeout multiple of BTI's deal suggests Altria is worth "at least" $76 per share.

PRICE ACTION: In early trading, Altria Group added 0.2% to $72.33, while Philip Morris gained nearly 1% to $102.47 per share.