MO Altria Group Inc

By Jennifer Maloney 

Altria Group Inc.'s $12.8 billion investment for a 35% stake in Juul Labs Inc. gives the e-cigarette maker more marketing muscle, expanded shelf space and a benefit that would have been unthinkable from a cigarette company in the past: an easier path to Washington's approval.

The tobacco giant has agreed to provide Juul with a range of services expected to include help to smooth over the e-cigarette maker's rocky relationship with the Food and Drug Administration. Juul has come under scrutiny by regulators because of the popularity of its products among children and teens. The agency recently announced sharp restrictions on the sale of flavored e-cigarettes such as Juul's. The startup's products accounted for about three-quarters of the U.S. e-cigarette market before the FDA announcement.

Juul is scheduled in February to meet with agency officials to begin the application process for allowing its products to remain on the market past a government-granted grace period ending in 2022, according to people familiar with the matter.

"It would not at all surprise me if we collaborated with their regulatory team on their FDA filings," Altria Chief Executive Howard Willard said on a conference call Thursday with analysts and reporters. "We have years of experience."

Juul says its mission has always been to help adult cigarette smokers switch to less harmful products. But it has stumbled along the way, with marketing that appealed to young people, an aborted antivaping program it created to present in schools, and a continuing struggle to tamp down the proliferation of images on social media posted by underage Juul users.

By contrast, Altria, the U.S. cigarette market leader, is expert at reaching adult smokers. It now offers Juul improved access to those consumers.

The tobacco giant brings "a level of sophistication that they need," said a person familiar with the matter.

Juul ads could soon appear on packs of Marlboros. The company's vaporizers will occupy retail shelf space alongside Altria's cigarette brands. Juul now has the option of deploying Altria's sales force to sell its products.

Some Juul employees were upset when they first learned that their company was in talks to take an investment from the tobacco giant, saying such a move was a betrayal of the startup's mission.

"As counterintuitive as it may seem, Altria wants to support our journey, " Juul Chief Executive Kevin Burns wrote Thursday in a memo to staff. "We understand the doubt. We doubted as well. But if we are true to our mission we believe we need to look through the obvious negative headlines and doubters and take the opportunity to accelerate the decline of cigarette smoking in the USA and around the world."

Juul is using most of the cash from Altria to make payments to shareholders and staff as well as retention packages to employees who stay, according to people familiar with the matter. Fully $2 billion is allocated for payments to the company's 1,500 employees, the people said.

The cash investment values Juul at about $38 billion, vaulting the closely held company's valuation past well known companies such as Ford Motor Co. and Target Corp.

Juul will stay independent for now. Altria's stake is limited to 35% for six years, and the agreement allows Altria to appoint a third of Juul's board members if antitrust regulators approve the deal.

The investment marks a change in tone for Altria, which Thursday for the first time said it was preparing "for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes."

Altria earlier this month said it would invest $1.8 billion in Canadian marijuana grower Cronos Group Inc., pushing into a nascent business that is illegal on the federal level in the U.S. but could help Altria expand its reach overseas.

The Richmond, Va.-based tobacco company is taking out $14.6 billion in debt to finance the Juul stock purchase and its investment in Cronos. Altria plans to cut its workforce and reduce spending on third-party services to help offset the interest expense from the debt. A spokesman for Altria said the company hadn't yet determined the number of jobs it would cut.

Perella Weinberg Partners and JPMorgan Chase & Co. advised Altria on the transaction. Goldman Sachs Group Inc. advised Juul.

--Allison Prang and Dana Mattioli contributed to this article.

Write to Jennifer Maloney at jennifer.maloney@wsj.com

(END) Dow Jones Newswires

December 20, 2018 14:01 ET (19:01 GMT)

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