Altria Chairman and CEO Howard Willard says its investment in Juul is the most sustainable opportunity to generate significant income in the e-vapor category.
RICHMOND, Va. — December has been an exciting month for Altria Group Inc.
On Dec. 10, the U.S. tobacco leader announced a $1.8-billion minority stake in Canadian cannabis company Cronos Group Inc. And then, on Dec. 20, Altria went even bigger with a $12.8-billion investment in e-vapor company, Juul Labs Inc.
"These investments complement our very strong core tobacco businesses and provide exciting opportunities for future growth," Altria Group Inc. Chairman and CEO Howard Willard said during a conference call Dec. 20.
Calling it a "significant action to prepare for Altria's future," the chief executive explained that its investment in Juul is "a unique and compelling opportunity."
Speculation around a deal has been growing for the past three weeks and should not have come as a surprise to most. As Willard noted, the company has a history of investing in successful companies in growing tobacco segments.
"Over our history, we've successfully identified growing tobacco categories, gained access to the leading companies and brands in those categories, and then applied our strengths to increase their value and earnings contribution to our overall business," he said. "That was the case with John Middleton [Co.] and UST [U.S. Tobacco Smokeless Tobacco Co.], and it is a similar approach we are taking with our investment in Juul."
Altria will offer its best-in-class services to Juul, but the San Francisco-based company will remain independent and retain complete operational autonomy.
"It's important to both Juul and us that they continue to operate with the entrepreneurial passion that has made them so successful," Willard explained.
"Let's imagine the combination of Juul's leading market position, brand equity and deep innovation pipeline with our strong retail presence, our ability to connect directly with adult smokers on our company's databases while avoiding unintended audiences, our leading sales organization which covers approximately 230,000 stores, and our deep regulatory affairs expertise," he added.
The investment in Juul comes just two weeks after Altria announced it was discontinuing the production and distribution of all its MarkTen and Green Smoke vapor products, and VERVE oral nicotine containing products. The company based the decision on the financial performance of the products and the current regulatory environment, as Convenience Store News previously reported.
"We believe the investment in Juul represents the fastest and most sustainable opportunity to generate the most significant income in the e-vapor category. The geo-economics today are attractive and we expect our strong distribution infrastructure to help accelerate their financial performance," Willard said during the Dec. 20 call.
"We have long said that providing adult smokers with superior, satisfying products with the potential to reduce harm is the best way to achieve tobacco harm reduction. Through Juul, we are making the biggest investment in our history toward that goal," he continued.
In addition to being an e-vapor leader in the United States, Juul operates in seven countries outside the U.S. — giving it significant opportunities to grab a piece of the estimated $23-billion global next-generation product market.
According to Willard, this growth will not overlap with Altria's current business operations and serves to diversify its future income streams beyond the domestic market.
"Our investment in Juul complements our leading non-combustible offerings with Copenhagen in smokeless tobacco and our U.S. commercialization rights to PMI's [Philip Morris International's] iQOS product, the leading global heat-not-burn product," he said.
As leader in the e-vapor market, Juul has drawn the attention of the Food and Drug Administration (FDA) as the agency makes youth prevention a top priority.
To highlight its commitment to youth prevention, Juul unveiled its action plan to curb underage use in November. The plan includes removing its flavored Juul pods from all retail outlets (they are now only available online); enhancing its age-verification process for online sales; and shutting down its social media accounts.
"Altria and Juul are committed to preventing kids from using any tobacco products. As recent studies have made clear, youth vaping is a serious problem which both Altria and Juul are committed to solve," Willard said.
"Together Juul and Altria will work to prevent youth usage through their announced initiatives, further technological developments, and increased advocacy for raising the minimum age of purchase for all tobacco products to 21," he added.
As Convenience Store News previously reported, Altria entered the cannabis market with a $1.8-billion investment in Toronto-based Cronos. The transaction is expected to close in the first half of 2019.
"Through Cronos, Altria will be positioned to participate in the emerging global cannabis sector, which we believe is poised for rapid growth over the next decade. It will also create a new growth opportunity in an adjacent category that is complementary to our strong core tobacco businesses," Willard explained.
"Cronos will be one of the best-capitalized cannabinoid businesses, which we expect will allow them to accelerate their strategies to achieve global leadership in the cannabis industry," he added.
With these back-to-back deals, Altria expects that the debt incurred to finance the Cronos and Juul transactions will increase its interest expense going forward. With that in mind, the company unveiled a cost reduction program designed to deliver approximately $500 million to $600 million in annualized cost savings by the end of 2019.
This program will include, among other things, reducing third-party spending across the business and workforce reductions.
"We expect the savings generated through the program to offset most of the expected interest expense increase in 2019," Willard said.
Altria expects to provide its 2019 full-year earnings guidance in January with its 2018 fourth-quarter earnings release.
In relation to the Juul deal, Perella Weinberg Partners LP and J.P. Morgan Securities LLC are acting as financial advisors to Altria. Wachtell, Lipton, Rosen & Katz is providing legal counsel to Altria for the deal, and Hunton Andrews Kurth LLP is providing legal counsel regarding the financing.
Goldman Sachs is the financial advisor to Juul. Pillsbury, Winthrop, Shaw, Pittman and Cleary, Gottlieb, Steen & Hamilton are providing legal counsel to Juul.
"We're excited about what we believe will be the most compelling offering for adult tobacco consumers and investors, with ownership or exposure to leading brands in each of our categories — including Marlboro, Black & Mild, Copenhagen, Juul and iQOS," Willard said.
Altria's wholly owned subsidiaries include Philip Morris USA Inc., U.S. Smokeless Tobacco Co. LLC, John Middleton Co., Sherman Group Holdings LLC and its subsidiaries Nu Mark LLC, Ste. Michelle Wine Estates Ltd. and Philip Morris Capital Corp. Altria also holds an equity investment in Anheuser-Busch InBev SA/NV.