Juul likes to boast about its independence from the big tobacco groups. That claim now rings hollow. The ecigarette company is selling a 35 per cent stake for $12.8bn to Marlboro cigarette maker Altria. The deal involves big risks on both sides. These are worth taking.
For Juul, the tie-up could worsen its standing with regulators. Stanford design graduates Adam Bowen and James Monsees founded the business with a grandiose mission to improve public health. That aspiration could be tarnished by teaming up with a company that gets 86 per cent of its revenues from tobacco. Juul has already had to take sweetly flavoured products off the shelves in response to regulators’ concerns about ecigarettes’ impact on adolescents. This week, the US surgeon general stepped-up warnings. Juul’s use of nicotine salts allows particularly high levels of the drug to be inhaled, he said.
At least the deal’s high price tag will cushion Juul’s descent from the moral high ground. The risks are greater for Altria. If Juul’s spectacular growth — sales jumped 600 per cent last year — is halted by regulators, it will have paid too much for a business with an estimated $2bn of annual sales. The deal takes Altria’s debt to about 2.4 times ebitda, although a cost-cutting exercise will help offset the interest expense. Conversely, if Juul’s success continues, Altria is helping to undermine its own business. As well as providing funds, Altria will support Juul in marketing its products and taking up prized shelf-space in convenience stores.
There remains a powerful logic to the deal even so. Altria is struggling to build its own smokeless products business. Its ecigarettes brands, MarkTen and GreenSmoke, are being discontinued after failing to compete against Juul’s intense hit and cool design. A further high may follow if cannabis becomes legal under federal law. Altria this month spent $1.8bn on buying a 45 per cent stake in Cronos Group, a Canadian cannabis business. While most marijuana users smoke it, vaping is on the rise.
Altria deserves credit for its boldness. Fears about cannibalising an existing business often stop companies embracing new technology. But it is already clear that Altria has to reinvent itself. Shares are down almost 30 per cent over the past year. In the US, smoking has dropped to the lowest levels on record. For Altria, that trend is as deadly as its product. Doing nothing could be fatal.
Get alerts on Altria Group Inc when a new story is published