Altria Is Nearing a Deal to Take a 35% Stake in Juul--Update
December 19 2018 - 1:54PM
Dow Jones News
By Dana Mattioli, Jennifer Maloney and Dana Cimilluca
Altria Group Inc. is nearing a deal to take a 35% stake in
e-cigarette startup Juul Labs Inc. at a roughly $38 billion
valuation, according to people familiar with the matter, an
investment that would make Juul one of the most valuable private
companies.
The $12.8 billion cash injection could be announced as soon as
this week, the people said. It would more than double what Juul was
valued at just a few months ago, a sign of how quickly the startup
has been growing and Altria's desire to find growth outside its
shrinking cigarette business. The Wall Street Journal earlier
reported on the discussions.
At $38 billion, three-year-old Juul would be worth more than
several well-known Silicon Valley startups, including Airbnb, the
home-sharing service; Elon Musk's space venture SpaceX; and three
times as much as Pinterest. Juul's valuation would be on par with
the market capitalization of public companies such as Delta Air
Lines Inc., Target Corp. and Ford Motor Co.
The rich valuation comes at a time that the San Francisco
company 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.
Juul, which has about 1,500 employees, was on track for $2
billion in annual revenue. It has outperformed its internal
forecasts from its last funding round, according to a person
familiar with the matter. The company has profit margins as high as
75%, the person added, which is much higher than traditional
tobacco.
The investment would give the Marlboro maker greater access to a
rapidly growing but increasingly controversial segment of the
nicotine market. It would also expand Altria's reach beyond the
U.S. Currently, Philip Morris International Inc. sells Marlboro and
other Altria brands outside the U.S. Juul products are sold in
Canada, the U.K., Israel and Russia, and the company has expansion
plans in Europe and Asia.
Some Juul employees have been upset by their company's talks
with Altria, saying it is a betrayal of the startup's mission to
help cigarette smokers switch to less-harmful products. In an
all-hands meeting after the Journal first reported the discussions,
Juul Chief Executive Kevin Burns told staff that any deal would
have to meet criteria including Juul maintaining full control of
the company, employees having the option to cash out shares and the
new investor taking actions to support Juul's mission, according to
a person familiar with the matter.
A deal with Altria would give Juul access to better shelf space
at retailers and marketing access to millions of cigarette
smokers.
Youth use of e-cigarettes has soared over the past year, thanks
largely to Juul's thumb-drive shaped vaporizers, whose sales have
skyrocketed since mid-2017. One out of every five high-school
students -- more than three million teens -- reported using
e-cigarettes recently, according to a federal survey conducted this
past spring.
Altria's stock had declined nearly 30% over the past year as the
company grappled with declines in traditional smokers and a
potential U.S. ban on menthol cigarettes.The Richmond, Va.-based
company is now pivoting to areas of growth in the market. Earlier
this month, Altria made a $1.8 billion investment in Canadian
cannabis company Cronos. That deal will give Altria access to a
growing part of the industry as marijuana becomes legalized in more
markets.
Altria's pursuit of Juul signals a lack of confidence in a
heat-not-burn device called IQOS that it hopes to market in the
U.S. in a partnership with Philip Morris International. The
product, which heats tobacco but doesn't burn it, has gained
traction in Japan and other countries, but its prospects in the
U.S. are unclear.
In January, an advisory committee to the Food and Drug
Administration said scientific evidence was insufficient to support
an ambitious marketing claim proposed by Philip Morris that
switching to IQOS from cigarettes reduces the risks of
tobacco-related disease.
Juul, like many other e-cigarette devices, is sold without
formal FDA approval and has been able to advertise on social media
unlike traditional cigarette brands. The FDA has given e-cigarettes
already on the market several years before they must apply for
approval.
To combat underage use, the FDA recently imposed restrictions on
the sale of certain flavors of e-cigarettes that it says appeal to
teens. Juul refills with non-tobacco flavors such as mango and
cucumber account for a sizable chunk of its sales, according to
analysts.
Juul has taken steps to restrict sales to minors, including
pulling all but its mint, menthol and tobacco-flavored products
from bricks-and-mortar stores. It continues to sell all its flavors
on its website, which it says has age verification technology. The
company says its products are intended for adult smokers and it has
discontinued its use of U.S. social media.
Altria recently discontinued its own e-cigarette products, sold
under the MarkTen and Green Smoke brands, which had failed to gain
much traction in the marketplace.
Write to Dana Mattioli at dana.mattioli@wsj.com, Jennifer
Maloney at jennifer.maloney@wsj.com and Dana Cimilluca at
dana.cimilluca@wsj.com
(END) Dow Jones Newswires
December 19, 2018 13:39 ET (18:39 GMT)
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