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Digging Deep into Altria’s Investment in JUUL Labs

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Altria’s investment

On December 20, Altria Group (MO) announced a $12.8 billion investment in JUUL Labs for a 35% stake in the e-cigarette company. According to the agreement, JUUL Labs will operate as an independent company and get access to Altria’s retail shelf space, where it can market its products to Altria’s customers using its database. JUUL could also use Altria’s experience in logistics and distribution to improve its efficiency and reach.

After getting clearance from antitrust regulators, Altria could appoint one-third of JUUL’s board of directors. Under the standstill agreement, Altria can’t increase its stake in JUUL from 35%. Also, Altria can’t sell or transfer its stake in JUUL for the next six years.

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JUUL’s growth prospects

During its fourth-quarter earnings call on January 31, Altria’s management stated that JUUL’s revenue increased from $200 million in 2017 to $1 billion in 2018 with sales of its refill kit pods growing 600% to 450 million. According to Altria’s estimations, JUUL sales represent 30% of the e-vapor category, which includes both open and closed systems.

Between 2015 and 2017, the sales growth of e-vapor products had stagnated. However, in 2018, the sales growth accelerated, and Altria’s management expects US sales of e-vapor products to grow at a compound annual rate of 15%–20% through 2023.

Global e-vapor and the heat-not-burn segment are estimated by Altria at $23 billion in 2018. With JUUL currently operational in just eight countries, there’s significant scope to expand.

With all these growth prospects and improvement in JUUL’s margins due to increased scale and automation in its supply chain, Altria expects its investment in JUUL to deliver returns above the weighted average cost of capital in 2023.

Next in this series, we’ll look at Altria’s investment in Cronos Group (CRON).

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