Altria Invests $12.8 Billion in E-Cigarette Maker Juul

(Bloomberg) -- Juul Labs Inc. and Altria Group Inc. just did a deal that transforms them both: The e-cigarette maker is now one of Silicon Valley’s most valuable privately held companies, and the tobacco giant is relevant again for cigarette-averse Americans.

The $12.8 billion deal, which gives Altria a 35 percent stake, values San Francisco-based Juul at $38 billion and will put its products next to Marlboro cigarettes on American retail shelves. Altria, which is focused on the U.S. market after spinning off Philip Morris International Inc. in 2008, will get one-third of the seats on Juul’s board upon antitrust clearance. It doesn’t get a controlling stake, leaving Juul operationally independent.

With smoking in decline, the deal furthers Altria’s push away from cigarettes and into higher-growth businesses. It comes on the heels of its investment in Canadian cannabis company Cronos Group Inc. earlier this month. Altria also has a deal to market Philip Morris’s “heat not burn” device IQOS, already sold internationally, if it wins U.S. regulatory approval.

Altria’s shares fell as much as 3.6 percent in New York on Thursday to $49.57 as of 10:19 a.m., the lowest intraday level since August 2015. S&P downgraded the company’s credit rating to BBB following the Juul and Cronos deals, noting it doesn’t see “significant near-term investment returns” for Altria. Moody’s reaffirmed its rating but changed its outlook on Altria to negative.

Valuation Boost

For Juul, the tie-up more than doubles its valuation from just a few months ago, when it was worth $16 billion after Tiger Global Management led a $1.2 billion investment. The Altria deal makes Juul more valuable than other closely held companies Airbnb Inc. or Elon Musk’s SpaceX, though still less than Uber Technologies Inc.

On a Thursday conference call, Altria Chief Executive Officer Howard Willard described the deal as having “long-term benefits for adult smokers and our shareholders.”

He also addressed questions of whether Altria had overpaid. Altria had been watching Juul’s growth for awhile, finding it continually exceeded expectations, and sees international growth as a main rationale for the deal. The deal is expected to become “highly cash generative” after one or two years of investing in Juul’s growth, executives said.

Compelling, Alarming

Analysts and antismoking groups both said the deal made for a powerful combination -- for better or for worse.

It “presents a compelling and potentially highly synergistic opportunity” with Altria’s stake in cannabis producer Cronos, said Wells Fargo analyst Bonnie Herzog, who said she sees the Juul deal becoming accretive in late 2020, depending on the timing of anti-trust approval. Herzog has an outperform recommendation on the shares.

The Campaign for Tobacco-Free Kids called the union a “truly alarming development for public health and brings together the two companies that have been the most successful in marketing their highly addictive products to kids.”

Since launching in 2015, Juul has been a runaway success, attracting the ire of parents and regulators who say the company’s devices hook teenagers. The startup has positioned itself as a technology company on a mission to help addicted smokers quit tar-burning cigarettes.

Altria, however, says the deal unites both companies in moving adult cigarette smokers into products that carry less health risk. Philip Morris is already marketing IQOS as reduced-risk in some countries, and Altria says it sees IQOS as a complementary product that won’t compete with Juul. Executives on the call acknowledged that if concerns about youth smoking aren’t resolved, it could put the entire vaping business at risk, even for adult smokers. As such, it’s increasing its advocacy to raise the minimum purchase age for all tobacco products to 21, executives said.

Cost Cuts

As part of the agreement, Marlboro will put promotional material for Juul’s products in its cigarette cartons, according to a statement Thursday. Altria, which sells its cigarettes only in the U.S., benefits from international exposure as Juul expands to new markets outside the country.

Altria also announced cost cuts of about $500 million to $600 million a year by the end of 2019. This includes culling “third-party spending across the business,” as well as workforce reductions, the company said.

The deal is making Juul founders Adam Bowen and James Monsees the first e-cigarette billionaires.

Altria will be subject to a so-called standstill agreement under which it may not increase its stake beyond 35 percent. The cigarette maker also agreed not to sell the shares for six years, during which Juul will be Altria’s only e-vapor business.

Altria executives said on the call that the deal has provisions that would prevent competitors from buying a large stake, but that nothing bars Juul from partnering with other companies internationally. Executives said they have no knowledge of how the U.S. Food and Drug Administration, which has expressed concerns about youth smokers and flavors, views the deal.

--With assistance from Sophie Alexander.

To contact the reporters on this story: Olivia Zaleski in San Francisco at ozaleski@bloomberg.net;Tiffany Kary in New York at tkary@bloomberg.net

To contact the editors responsible for this story: Elizabeth Fournier at efournier5@bloomberg.net, Anne Riley Moffat, Timothy Annett

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