Commentary

Altria Eying 35% Stake In Juul For A Startling $12.8B

Altria Group, the marketer of MarlboroVirginia SlimsBenson & Hedges and other vintage cigarette brands, and Juul Labs, the three-year-old startup that delivers a nicotine fix through a device that looks like a USB flash drive, are reportedly close to making a deal. The Wall Street Journal broke the new yesterday and several other media outlets, citing inside sources, have confirmed the pending agreement.

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“The union -- which would create an alliance between one of public health’s greatest villains and the start-up that would upend it -- entails cigarette giant Altria investing $12.8 billion for a 35% stake in Juul, at a $38 billion valuation, according to two people briefed on the negotiations,” report Matt Richtel and Sheila Kaplan for the New York Times.

“The deal would give Juul access to Altria’s prized shelf-space in convenience stores and its marketing prowess, and the possibility of putting a mention of its products and coupons into Marlboro cigarette packages,” they continue.

“The rich valuation comes at a time that [Juul] is under fire from regulators, educators and public health officials over its popularity among children and teens. Juul says its products are designed to help adult cigarette smokers switch to a less-harmful way to inhale nicotine, but the company’s own research shows its sleek device has hooked many people who had never smoked or had quit smoking,” Dana Mattioli, Jennifer Maloney and Dana Cimilluca report for the WSJ

They say the company, which is based in San Francisco, has about 1,500 employees and is on track for $2 billion in annual revenue. It is now the market leader in e-cigs, “growing from 13.6% of the U.S. market in early 2017 to more than 75% last month, according to a Wells Fargo analysis of Nielsen retail data,” report Reuters’ Liana B. Baker and Harry Brumpton.

“The price tag is likely to surprise analysts who had broadly welcomed the prospect of a tie-up between the two companies but estimated that Altria would pay significantly less for a stake. Bonnie Herzog of Wells Fargo wrote in November that Altria could spend $4-to-$7 billion for 30-40% of Juul,” write James Fontanella-Khan, Andrew Edgecliffe-Johnson and Alistair Gray for Financial Times.

“The largest investors in Altria, which include Capital Group and Fidelity, were backing the transaction, said a banker close to one of Altria’s major shareholders,” they add.

“Under a more traditional analysis the valuation seems nuts,” the person tells them. “But if you consider that regular tobacco sales are declining and Juul is the future it makes a ton of sense to buy a stake at these levels.”

The deal, which would make “Juul Labs more valuable than Elon Musk’s SpaceX and Airbnb Inc.,” will also make billionaires out of founders Adam Bowen and James Monsees, Sophie Alexander reports for Bloomberg. Bowen and Monsees each owned 5.6% of Juul after a July funding round that valued each of their holdings at $843 million.

Avowed former smokers, “they knew a viable alternative to cigarettes would have to offer a nicotine level found in no other alternative on the market. It would also have to invite its own ritual,” according to the company’s origins story. “The result was JUUL.”

Ritual aside, “WHY IS JUUL WORTH $16 BILLION? IT’S MORE LIKE A CIGARETTE THAN YOU THINK,” screams the hed over Rachel Becker’s piece for The Verge

“If you’ve never smoked, and you try Juul for a few days, this is a recipe for addiction,” Portland State University chemistry professor David Peyton, who tested 11 different e-cig liquids with two colleagues, tells Becker.

“Peyton calls Juul a double-edged sword,” she writes. “You could make someone addicted who’s never been a smoker -- or, for someone who is addicted to nicotine, this could be a way to get off of cigarettes.”

Altria, which is based in Richmond, Va., owns 100% of Philip Morris, the name the company used from the 19th century until its rebranding in 2003 when Kraft Foods was still under its umbrella. It also owns U.S. Smokeless Tobacco Company, John Middleton, Nat Sherman, Nu Mark, which makes e-vapor products and Ste. Michelle Wine Estates. Kraft was spun off in 2007.

Earlier this month, Altria took a 45% stake in Cronos Group, a cannabis company based in British Columbia, Canada, for about $1.8 billion. 

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