Marlboro maker Altria Group, Inc. (NYSE: MO) announced on Thursday that it had taken a 35% stake in Juul Labs Inc., an e-cigarette firm, in an all-cash deal worth $12.8 billion. The investment enables Altria to expand its portfolio outside regular cigarettes. The investment is seen as an attempt to offset declining cigarette use by one of the world’s biggest tobacco company.
Juul-Altria an unnatural combination
Altria’s investment pegs the worth of privately held Juul at $38 billion, almost equal to the value given by investors to home rental company Airbnb in early 2018. Other prominent businesses that have received similar valuations in the recent past include Pinterest Inc. and Space Exploration Technologies Corp., a company owned by Tesla’s founder. The investment, however, will not result in any management changes and Juul will operate as an independent firm.
The deal has already received the approval of the boards of both companies. The agreement has brought together two firms whose range of products continues to have an arguably profound effect on public health. Both firms, until now, were perceived to have different objectives.
With this most significant investment in its history, Altria now has control of half of the American tobacco market. Notably, Juul has a market share of more than 70% of the cartridge-based e-cigarettes in the United States.
After spinning off from Philip Morris International in 2008, Altria operates only in the US. However, Juul’s e-cigarettes have a presence in Canada, Israel, Russia, and the United Kingdom, in addition to the United States. The investment allows both parties to broaden their customer base.
While Altria aims to offset the slow decline in cigarette sales by venturing into the fast-growing market of e-cigarettes, Juul intends to capitalize on Altria’s massive distribution network and premium shelf space at stores. Altria will also advertise the products of Juul using inserts in cigarette packs and mailings. Under the agreement, Altria will receive a 35% share in the proceeds from Juul vaporizers and nicotine pods, which command 75% market share.
Ironically, until now, Juul has targeted people who were looking for a smoke-free source of nicotine. In a written statement Juul Chief Executive Kevin Burns said “We understand the controversy and skepticism that comes with an affiliation and partnership with the largest tobacco company in the US. We were skeptical as well. But over the course of the last several months, we were convinced by actions, not words, that, in fact, this partnership could help accelerate our success switching adult smokers.”
Commenting on the investment, Altria said: “significant action to prepare for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes.”
Altria Chief Executive Howard Willard stated that the Juul investment is made to cater to people who prefer non-combustible products over cigarettes. Howard also called Juul a leader in “switching adult smokers.”
The deal has sent shock waves among anti-tobacco advocates, who are concerned that the combined political power of both companies could crush attempts to secure a regulation.
Last month, the FDA was anticipated to ban e-cigarettes. The regulator, instead, backed legislation that would allow e-cigarettes to be sold only in certain shops closed to teenagers. Furthermore, the FDA has sought a ban on mentholated cigarettes. Of late, Juul is being investigated after teenagers became addicted to its products. The FDA wants to implement a blanket ban on the sale of flavored e-cigarettes to teenagers.
Matthew Myers, president of the Campaign for Tobacco-Free Kids, has suggested the Food and Drug Administration implement an immediate regulation “to stop tobacco companies from reversing decades of progress and addicting another generation of kids.”
Altria‘s investment in Juul dwarfs the $1.8 billion investment made in Canadian cannabis company Cronos Group earlier this month.
As the New York Times has rightly pointed out, “Juul has staked its future growth on a deal with the very industry it sought to transform, while Altria can profit from, and even influence, its would-be slayer.”
The market, which is mainly concerned about long-term earnings, is expected to treat the information positively. As a result, we can expect the stock of Altria to turn bullish in the near term.
Technically, the stock is moving along a descending channel. However, the RSI indicator reflects an oversold scenario. As a result, there is a possibility of a bullish reversal in the stock. Positions, if any, should be opened only after the reversal is confirmed.
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