FTC Challenge Gives Altria a Chance to Walk Away From Juul Stake

(Bloomberg) -- With U.S. antitrust authorities suing to reverse Altria Group Inc.’s investment in Juul Labs Inc., the Marlboro maker may be getting a chance to undo the troubled deal, according to industry analysts. They warn, however, that investors’ faith in the company may be difficult to restore.

The late 2018 deal that’s being challenged by the Federal Trade Commission was supposed to combine Altria’s marketing might with Silicon Valley upstart Juul. Instead, Altria has written down the investment twice, slashing the 35% stake’s value to $4.2 billion in January as health concerns about e-cigarettes led to a regulatory crackdown. Altria originally paid $12.8 billion for the position.

Altria, which wants to expand its e-cigarette market share as traditional smoking rates decline, says it will defend the deal. But maybe it shouldn’t, experts say.

Here’s what analysts are saying after the FTC filed its complaint.

Morgan Stanley, Pamela Kaufman

• Altria’s stake is now essentially a call option on Juul, Kaufman says, giving the cigarette company a potential out if Juul fails to secure regulatory approvals for its products and the rise in youth vaping fails to reverse.
• “Given the elevated uncertainty that Juul continues to face, we think investors would take a potential Juul divestiture in stride and could be relieved if MO were to distance itself from the company,” Kaufman wrote, referring to Altria by its stock market ticker.

Jefferies, Owen Bennett

• Given the trial isn’t set to start until early 2021, there’s unlikely to be an outcome anytime soon, Bennett wrote. However, the FTC action will likely support investor class action lawsuits that Altria failed to investigate Juul sufficiently before going ahead with the deal.
• “We have spoken to a number of investors that have said they won’t invest in MO with current management, their credibility taking a big dent following the Juul investment,” Bennett said. Their concerns focus on Altria taking a stake in spite of reports of teenage usage, “therefore allegations of anti-competitive behavior alongside this is likely to dent confidence further.”
• Bennett notes that Altria’s other recent investment of $1.8 billion for a 45% stake in cannabis company Cronos is now only worth $800 million.

Bernstein, Callum Elliott

• The FTC challenge “introduces even more risk/uncertainty into an already clouded outlook,” Elliott said. If Altria is forced to unwind its investment it could leave the company with no exposure to vaping, since it already discontinued its own e-cigarette business, he said.
• That could force it to do yet another deal for access to vaping products. “Investors with whom we speak shudder at the thought of yet more M&A and capital mis-allocation after the Juul debacle,” Elliott wrote.

Citigroup, Adam Spielman

• If Altria is forced to sell its stake in Juul, it would undermine the company’s stated strategy to lead smokers to switch to non-combustible products. Altria lacks the research and development capabilities to develop a substitute, Spielman said in a note to clients.
• Altria would likely be forced to ask Philip Morris International Inc., which sells the Marlboro brand overseas, for a license for its Mesh e-cigarette product, Spielman said. “The trouble is it is unclear when Mesh will be authorized for U.S. marketing, what terms MO would be able to negotiate, or even how good the product is,” he said. “MO would also end up being even more dependent on PM.”

Stifel, Christopher Growe

• “It is not clear to us how this transaction can be unwound.” At the same time, the steady drumbeat of negative headlines around Juul over the last year means that if Altria is forced to divest its stake, it’s unlikely to impact earnings or share performance.
• “We believe some investors view this stake negatively –- as a potential albatross for Altria,” Growe said. “To that end, unwinding the transaction would be welcome news for many of those investors.”

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