Altria’s Juul Stake Is the Least It Could Do

(Bloomberg Opinion) -- Altria Group Inc. has taken a $12.8 billion step toward making sure its business model doesn’t go up in smoke.

The maker of Marlboro cigarettes announced Thursday that it has taken a 35 percent stake in Juul Labs Inc., the U.S. market-share leader in e-cigarettes. The deal values Juul at $38 billion, and the agreement between the companies says that the upstart will continue to operate independently.

The logic behind this investment is sound: Cigarette consumption is in secular decline, and Altria and other legacy makers stand little chance of reversing that.

Altria’s Juul Stake Is the Least It Could Do

The threat level to the traditional cigarette business has escalated of late in the U.S. market. The Food and Drug Administration indicated in November it is seeking to ban menthol cigarettes, which Bloomberg News reports account for 35 percent of the U.S. market. That came after regulators had said earlier this year that they are exploring rules that would require cigarettes to contain non-addictive levels of nicotine.

Against that backdrop, you can see why Juul looks like something of a savior. The brand has proved popular with younger consumers — in fact, maybe a little too popular: The company recently axed social-media accounts and pulled some flavors of its product from retail stores in response to criticism about its appeal to teens, and to get ahead of FDA efforts to enforce some sales restrictions.

If anything, I wonder if Altria will regret not being even bolder in its pursuit of Juul. The investment will allow Altria to recognize equity income and send a message to investors that the company is embracing innovation. But, with Juul continuing to operate as an independent company, this arrangement only goes so far in insulating Altria from waning interest in cigarettes. As Bloomberg Intelligence analyst Kenneth Shea points out, buying Juul outright is what would really address that problem. (Though, of course, that likely wouldn’t have come cheap.)

We had already gotten some hint that Altria CEO Howard Willard, who stepped into the top job in May, was bringing new urgency to transforming Altria for a world in which its legacy business is less relevant. Earlier this month, the company announced it had agreed to pay $1.8 billion for a stake in Cronos Group Inc., one of a crop of Canadian companies blazing the trail in the nascent legal cannabis industry. As my colleague Tara Lachapelle has noted, this was a smart — and overdue — foray into a category with great promise for growth. And not just for tobacco producers, but other consumer-products companies as well.   

Altria executives are wise to look to dealmaking to secure the future of their besieged empire. But they may find themselves wishing down the road they had taken a bigger swing.

On Wednesday, beer giant Anheuser-Busch InBev NV became the latest beverage maker to enter the space when it announced a research partnership with Canadian cannabis company Tilray Inc.

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.

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