Altria And Juul End Noncompete Deal: Heres What That Means For Ecigarette Sales And Marketing

Altria Group Inc. said Friday that Juul Labs Inc . that the purchase of the vape company comes from a non-competitive agreement, freeing up both companies to pursue their own strategies.

In regulatory filings, the tobacco giant said it exercised its option to waive non-compete obligations related to its stake in Juul. The option includes the right to withdraw if the value of the investment falls below the initial book value of $12.8 billion. On June 30, the stock was worth only $450 million.

Altria paid $12.8 billion in 2018 to acquire a 35% stake in Juul, which at the time was worth about $35 trillion. Shares have been steadily losing steam in the face of regulatory scrutiny over Juul's flavors and marketing, which it blames on the rise of teenage vaping. In early September, Juul agreed to pay at least $438.5 million in settlements in more than 30 states.

Altria also loses the right to appoint its board of directors, among other changes, the company said. You can now appoint a single independent director and you must own at least 10% of Juul.

According to the filing, the company's Juul shares will convert into single-voting common stock, "significantly diluting our voting rights." Juul is now free to sell to another tobacco company or go solo, and Altria can invest in another vaporizer company or develop its own product.

In 2017, Juul rose to the top of the e-cigarette market. But the company's value plummeted as quickly as a crisis led to hundreds of lawsuits over the sale of the company to teenagers. Photo illustration. Jacob Reynolds / WSJ

Analysts are divided on the future of the two companies.

Bernstein said he had been waiting for the move for several months since the Food and Drug Administration told Juul in June that it could not sell e-cigarettes in the United States under a marketing refusal, or MDO. The regulator suspended that order in July and said it would continue to review the company's products.

now read FDA bans Juul Vape products and recalls all existing ones

"We expect that Altria will now seek to liquidate its stake in Juul, crystallizing a loss of more than $12 trillion on its investment for tax purposes," Bernstein said in a note to clients. "We expect the realization of this tax loss will further accelerate the divestment of Altria's stake in ABI (Anheuser-Busch International) as the loss on the Juul investment fully offsets the significant gain on Altria's stake in ABI and will save Altria $2 billion in tax obligations".

don't lose Vaping makes teens 7 times more likely to get COVID-19.

Bernstein said there are few good options for Altria among existing vape companies, and privately held NJOY is "probably the best of a bad bunch . " Bernstein has a market perform rating on Altria with a $45 price target on the stock, which is about 10.5% of the current price.

Jefferies analyst Owen Bennett said he expected Altria to retain its 35% stake in Juul and said "material upside" was possible. He said the company hopes to clear the FDA's marketing denial and expand internationally.

"Support could also be the possibility of a future Juul IPO or other large tobacco offering (but we think the latter possibility is highly unlikely)," Bennett wrote in a note to clients. "We currently value Juul's share at a published MO price target of $10 trillion."

Jefferies has a $53 price target on Altria.

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Cowen's Vivien Azer said Altria could use the move to reduce its exposure to limited risk products (RRP), a new category of tobacco industry products that are not potentially harmful to consumers.

Altria's July 2018 deal meant its only consumer prices were Juul vaporizers and Philip Morris International's smoke-free IQOS product sold in the United States. The IQOS product was the subject of a patent dispute with RJ Reynolds, which led to an import ban. last year in the US.

Altria, meanwhile, sued RJ Reynolds over patents used in the latter's Vuse line and was awarded more than $95 million by a North Carolina jury earlier this month.

"Given Altria's limited success with organic product development and the time it takes to file product development and PMTA (Premarket Tobacco Product Application), we believe Altria will try to enter the e-cigarette category (takes 7%: nicotine), sales. US) , said Azer.

The analyst also talked about NJOY as a possible target because it already has marketing approval from the FDA. Cowen also has a market perform rating and a $45 price target on Altria stock.

Shares of Altria fell 1.1% on Friday and are down 14% year to date, while the S&P 500 is down 24%.