Could Juul be the Newest Jewel in Altria's Crown?

The basic Juul device, which is rechargeable on a USB charging dock, shown with replaceable Juul pods.

Photo: Juul Labs

An influx of cash for Christmas for the e-vapor startup.

By Bob Crew, London Correspondent

See TI Editorial on page 20 for the latest news on this topic.—Editor.

It looks like there will be a $4- to $7-billion Christmas present for the Juul e-cigarette vaping company, probably at the beginning of 2019.

This prospect has excited the media, both trade and general audience. From late November, there has been an avalanche of stories on the Internet describing the negotiations. And whether rightly or wrongly, almost all assumed that a successful acquisition is a foregone conclusion.

One way or another, Altria/Philip Morris is in no-nonsense talks to take a stake in Juul Labs, the $16-billion e-cigarette U.S. startup that has swiftly and spectacularly grabbed three-quarters of the U.S. vaping market since its launch in 2015 (the company was called Pax Labs then).

This news has to be the biggest “breaking-new-ground” tobacco industry story of the year, not only in the United States, but also globally.

A stake in Juul by Altria is a big takeaway indeed. What a gift-wrapped present this is going to be for Juul if the deal is all set and ready to go in time for the festive season!

Interestingly, these talks came hot on the heels of the U.S. Food and Drug Administration’s (FDA) recommendation of “sweeping measures” to crack down on what it has referred to as an “epidemic” of underage vaping.

A Clear Path to Control

But it really does need to be clearly understood that “a deal will only happen if Altria has a path to control,” according to a mystery person who has spoken to “several large investors in the Altria tobacco company.”

Financial analysts at Wells Fargo have estimated that U.S. e-cigarette sales have risen from $2.5 billion in 2012 to $5.5 billion this year.

Meanwhile, the traditional tobacco companies have, predictably, been pouring millions and/or billions of dollars into the carefully planned development of alternatives to combustible cigarettes.

They have also had to watch their share of this new market dwindle as Juul has grown rapidly and been on a roll to become the jewel in the crown of the U.S. alternative e-cig vaping market.

It’s not rocket science to deduce that, with a staggering a $2.5 to $5.5 billion leap in the market, it was only a matter of time before, sooner or later, a big tobacco company would set its sights.

Since its founding in 2007 by two business partners who met as Stanford design program grad students, Juul Labs’ mission has been to eliminate cigarettes by offering existing adult smokers a true alternative to combustible cigarettes. Based on their research, the partners learned that smokers who want to switch are looking for a device that does not look or feel like a cigarette. Photo: Juul Labs

Wells Fargo Welcomes the Deal

Of course, financial analysts are still looking as closely as they can at sales data for blips, slips and shifts in the market.

Bonnie Herzog—an analyst at Wells Fargo—has reportedly noted that she has been “disappointed and somewhat mystified” by the magnitude of the 8.7 per cent decline in the cigarette volumes reported in her latest weekly data from Nielsen (in November 2018).

Trends for the Marlboro brand looked like they were stabilizing at that point, she reckoned—but she is also on record for “welcoming” the prospect of a deal with Juul, which was able to claim a very-Christmas-like 76 percent share of its U.S. market.

So, what could Altria afford to finally bid, let us say, for an initial stake and take of at least 30 to 40 per cent in Juul at this stage? Herzog has estimated “$4 to $7 billion” in line with Altria’s “reduced risk strategy” and also in view of the prospect of “exposure to markets outside the U.S.”

Whilst underage vaping is a ‘serious’ problem, one venture capital company in New York has pointed out that there’s one billion the world’s smokers out there who can “more effectively” switch to healthier e-cigarettes than carry on with combustible tobacco products.

Clean Regulatory Bill of Health Juul appears to have moved swiftly—though maybe not instantly—to get ahead of the aforementioned FDA crackdown on e-cigarettes. They did it by ditching the sale of flavors from its nicotine liquids from more than 90,000 convenience stores. It was equally swift in shutting down its social media accounts and bringing in Bluetooth-based technology to help track where its devices are sold.

So, it has done what would seem to be all the right things and ought to have gotten itself a clean bill of health, though this is a federal agency Juul is dealing with so who knows?

Also, it remains to be seen if the Altria takeover effort may run into roadblocks, although conventional wisdom does that. So, watch this space in the months ahead: There are important lessons to be learned here about the future shape of the market and how best to adjust to it.

Finally, a Happy New Year to you all, and especially to Altria and Juul!