Altria's Reported Interest In Juul Wins Sell-Side Support

Marlboro producer Altria Group Inc MO is in talks to buy a large minority stake in leading e-cigarette start-up Juul Labs, according to a Wednesday Wall Street Journal report.

Why It’s Important

Experts lauded Altria’s diversification effort given the increasingly fragmented market.

“Strategically, a stake in Juul could make sense for Altria, as it would give it exposure to a fast growing product that poses a threat to its cigarette business,” according to Morgan Stanley. “Altria does not have a robust reduced-risk product portfolio, and Juul's brand leadership and first-mover advantage in cartridge-based nicotine salt e-cigs could significantly enhance Altria's competitive position.”

By Bank of America Merrill Lynch’s estimates, Altria could conquer the vape category via Juul’s expanding 62-percent share while also recapturing competitive losses.

“Juul has had a stellar run in the latest 52-week period, with sales up 962-percent year-over-year,” according to BofA. “Juul's outperformance has been a drag on Altria’s stock price since at least the beginning of 2018, as its vapor share gains accelerated and investors fretted over Juul's performance [and] impact on combustibles.”

Ultimately, Juul could help Altria expand not only market share, but market power.

“Altria could potentially be able to better preserve the U.S. cigarette profit pool through an ownership interest in Juul by having greater influence over reduced risk pricing dynamics,” Morgan Stanley said, noting that Juul pods sell at a 30-percent discount to cigarettes.

Altria faces risk in increasingly unfavorable e-cigarette regulations, particularly amid heightened concerns over the product’s teen appeal.

The Deal's Feasability 

Juul was valued at $16 billion this summer and recorded $1.8 billion in retail sales last year — making it one of the nation’s most valuable start-ups. Yet Morgan Stanley suspects recent FDA crackdowns could depress the current value, and said Altria’s underlevered balance sheet could help.

BofA said: “Altria's current leverage is conservative ... suggesting to us that Altria could boost debt by $16 billion and still stay in compliance with their credit agreement covenants." 

What’s Next

Neither Altria nor Juul have confirmed the reported talks, but Altria has a history of investing in cigarette alternatives, including smokeless tobacco products and cigars.

The WSJ said a deal is weeks away — if it is to happen at all.

Related Links:

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How The FDA May Be Overstepping Bounds With New E-Cigarette Policy