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With Juul, Altria Got More Than It Bargained For

With Juul, Altria Got More Than It Bargained For

(Bloomberg Opinion) -- Altria Group Inc.’s investment in e-cigarette upstart Juul Labs Inc., announced last December, was meant as a $12.8 billion statement that the maker of Marlboros was future-proofing its business. But two announcements on Wednesday make clear that the Juul investment has not made the tobacco giant’s future any less hazy — and, in fact, may have made it even more so.

With Juul, Altria Got More Than It Bargained For

Altria and Philip Morris International Inc. said that they have called off merger talks that would have reunited two businesses that were once part of a single corporation and today sell the same products in different markets. (Altria is focused on the U.S. market and Philip Morris on international ones.)

It’s probably not a coincidence that the deal fell apart amid increasing scrutiny from Washington amid a spate of mysterious illnesses associated with vaping. Both the White House and Congress have shown interest in putting restrictions on this emerging product category, raising questions about Juul’s growth potential. Then Walmart Inc. announced last week it would cease selling e-cigarettes, another blow to a nascent industry that has been trying to pitch itself as a healthier alternative to smoking.

So it’s easy to see how a recombination may have looked unnecessarily risky to Philip Morris under these circumstances. Why join forces with Altria at a moment when U.S. regulators appear ready for a crackdown?

Meanwhile, Juul said Wednesday that its CEO Kevin Burns was stepping down and would be replaced by K.C. Crosthwaite, a veteran of Altria. This will probably be a helpful change for the upstart, as Crosthwaite has experience navigating complex regulatory environments. Burns had come to Juul from the c-suite of yogurt maker Chobani LLC — a business that is not exactly full of regulatory landmines.

Nevertheless, the mere fact of the leadership shakeup would appear to indicate that Altria was getting impatient with Juul’s ability to manage mounting public and political pressure over health concerns. Juul said this morning it will cease all advertising and lobbying in the U.S., a move that seems aimed at trying to show regulators that Juul can be a responsible corporate steward without government intervention.

Investors hadn’t seemed particularly enthusiastic about the Philip Morris and Altria deal, despite the advantages to such a merger that my colleague Tara Lachapelle has noted, including combined cash flow that would allow them to put more firepower behind product innovation. So today’s news should help lift both their share prices.

At the same time, today’s events are a stark reminder that Altria has yet to see a clear benefit from its bet on Juul — a cautionary tale for any stalwart in a mature industry that is looking for a savior in the form of an upstart.  

— With assistance from Tara Lachapelle and Max Nisen.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

©2019 Bloomberg L.P.