Sep 30, 2022 - Economy & Business

Big Tobacco takes on vaping: Marlboro maker Altria ends detente with Juul

Illustration of a vape pen sticking out of a carton of cigarettes.

Illustration:Aïda Amer/Axios

Philip Morris USA parent Altria Group is poised to re-enter the vaping space as the tobacco industry looks to e-cigarettes for much-needed revenue growth.

Driving the news: Marlboro seller Altria disclosed Friday that it had ended its noncompete agreement with Juul, after the value of its investment in the vaping company imploded when federal regulators moved against Juul’s products.

Why it matters: The cigarette industry, facing decades of declines in smoking rates, needs to identify a new route to growth — and e-cigarettes present opportunity even as they face increased oversight.

  • Altria is well suited to make a major play.
  • “The larger companies have a lot of experience, they have the legal expertise and just a long history of dealing with regulators, so they’re ... well positioned” to succeed in e-cigarettes, CFRA Research analyst Garrett Nelson tells Axios.

Catch up quick: Altria invested nearly $13 billion in Juul in 2018, taking a 35% stake in the then-booming company and agreeing to mothball its own vaping endeavors.

  • But Juul’s business soon came under scrutiny as watchdogs accused the company of marketing its products to kids.
  • The FDA this summer instructed Juul to remove its products from U.S. shelves, saying it failed to provide adequate data on its chemicals. The move triggered a legal battle over the future of the e-cigarette brand in the American market. The order is on hold for now.

That latest: Altria recently wrote down the value of its investment in Juul to $450 million.

  • The decision to end the noncompete “maximizes our flexibility to compete in the e-vapor space while maintaining our economic interest in Juul,” Altria said in a statement.

What to watch for: Altria will want to move quickly since it’s trailing tobacco competitors like Reynolds American and smaller vaping companies.

  • “They can either go it alone and do their own product — or they can make an acquisition. We think the second option is probably the more likely one,” Nelson says.

Keep in mind: Like smoking, vaping is addictive because e-cigarettes contain nicotine, the same addictive ingredient that’s in cigarettes.

  • The Biden administration’s FDA has been cracking down on the industry. Vaping proponents, meanwhile, point to arguments that vaping is less harmful than smoking and can serve as an off-ramp for tobacco addicts.

State of play: Health issues aside, vaping poses the prospect of a financial windfall for Altria, which has few other plausible routes for growth.

  • "Any earnings improvement has been driven by cost cuts, and you just can’t cut costs forever,” Nelson says. “At some point you have to diversify your revenue stream.”
  • Goldman Sachs analyst Bonnie Herzog wrote Friday that the move to terminate the non-compete is "very positive" for Altria, noting that the company can now pursue revenue from vaping while also retaining its stake in Juul, thus potentially capitalizing on any potential upside if Juul takes a turn for the better.

The other side: “This decision gives us more flexibility as it increases the financial and strategic options we can pursue to secure our business and address the impact of the FDA’s now stayed order,” Juul said in a statement, adding that the company is “confident” in its ability to meet the FDA’s requirements to get back onto the market.

  • Nelson, however, said he’s skeptical that Juul will reemerge as a competitor in the U.S.: “Most analysts are looking at it as a fairly low probability because this administration is cracking down on tobacco more than the prior administration.”

What’s next: If Altria decides to go the acquisition route, expect the company to target vaping businesses that have already obtained preliminary FDA approval to sell and market their products under the new regulatory regime that Juul has failed to navigate, Nelson says.

  • "They know the players in the industry, they’ve done their homework, so if they’re gonna make a move, it could happen fairly quickly,” Nelson says.
  • “But they have to have assurance they’re not going to be making a similar mistake as Juul, so I think they’ll be more careful in their due diligence process.”
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