On December 19, CNBC reported that Altria (MO) is on the verge of acquiring a 35% stake in the Juul Labs, an e-cigarette company, for $12.8 billion. The report stated that Altria’s board approved the investment and expects the formal announcement to be made before the market opens on December 20. At a valuation of $38 billion, Juul Labs is a valuable private company.
The growing popularity of e-cigarettes had a negative impact on cigarette sales. The e-cigarette market is dominated by Juul Labs with 74.5% of the market share for the four-week period ending on November 17, according to Wells Fargo analyst Bonnie Herzog. The CNBC report stated that Juul Labs’ revenues are close to $1.5 billion. Like cigarettes, Juul Labs’ pods aren’t taxed. The pods are also exempt from paying costs associated with the Master Settlement Agreement, which makes the company more profitable.
Recently, Juul Labs faced pressure from the FDA due to its popularity among teenagers. In order to curb the growing smoking rate among teenagers, Juul Labs announced in November that it will pull out some of its flavored nicotine pods from convenience stores. The company will also restrict its social media promotions. Juul Labs could utilize Altria’s expertise in handling regulatory matters and its strong distribution network to boost its sales.
With dwindling cigarette sales, the acquisition would give Altria access to the growing e-cigarette market. The acquisition would also give Altria an opportunity to expand its business beyond the US. Currently, Juul Labs sells its products in Canada, the United Kingdom, Israel, and Russia.
The deal would be Altria’s second major investment in December. The company acquired a 45% stake in Cronos Group, a Canadian cannabis company, for $1.8 billion.
The announcement appears to have increased investors’ confidence. Altria’s stock price bounced back from its 52-week low of $50.68 and closed at $51.40, which represents a rise of 1.0% from the previous day’s closing price. Year-to-date, Altria stock has declined 28% as of the closing on December 19. During the same period, Philip Morris International (PM) and British American Tobacco’s (BTI) stock prices have fallen 31.8% and 52.5%, respectively.