Altria Group Inc. made dramatic efforts to distance itself from the legal troubles of Juul, as it wrote down the value of its stake in the vaping company to about a third of what it initially paid.
Altria also said in a statement it has changed the terms of its minority investment in the company, including stopping all services other than regulatory affairs and said that it has an option to be released from its non-compete obligation in some circumstances. Altria valued its Juul stake at $4.2 billion at the end of 2019, after paying $12.8 billion in Dec. 2018.
Altria shares fell 1% to $49.60 in early trading Thursday. The stock was so far flat for the year.
For the tobacco company, it’s another blow as it attempts to broaden its portfolio beyond cigarettes. Atria’s 35% stake in Juul has become a headache as the e-cigarette market grapples with slew of vaping-related lung illnesses and deaths. Altria has also been named in lawsuits claiming youth addiction to Juul. These are new kinds of challenges for an old-guard company like Altria that’s used to taking things slow, getting FDA approval and testing the market before making big decisions.
Altria Chief Executive Howard Willard cited the “unexpected challenges” of Juul that had led to impairment charges and reported losses. The new charge comes amid a rise in lawsuits over Juul’s vaping devices, which allege it has addicted a new generation of youth and become a burden on school districts. Legal cases have increased by more than 80% since Oct.31, and many name Altria as a co-defendant.
Pivot prelude
The Juul writedown is “a prelude to a pivot to prioritizing other noncombustible products,” such as the IQOS vaporizer, Bloomberg Intelligence analysts Kenneth Shea and Gopal Srinivasan said in a note. Such a massive impairment charge “may raise concerns about CEO Howard Willard’s stewardship,” they said.
Altria’s move is a serious blow to Juul, once a high-flying Silicon Valley startup that threatened to disrupt the tobacco industry with a sleek product and hip, youthful marketing. It also heaps more pressure on the company as it heads into a critical moment. Juul and all other e-cigarette makers are required to apply with U.S. regulators by May 12 to keep selling their products.
“As we continue to reset the vapor category, we are committed to advancing the long-term potential for harm reduction for adult smokers while combatting underage use,” Juul CEO K.C. Crosthwaite said. Juul is focused on building the company for the long-term by preparing premarket tobacco product applications to earn authorization in the U.S., he said.
Revised terms
Under the revised terms of its minority investment, Altria said its non-compete option would be void if Juul can’t sell its products in the U.S. for at least a year, or if the value falls to less than 10% of its initial $12.8 billion investment.
Juul will also restructure its board to include two directors designated by Altria, three independent directors, the Juul CEO and three directors designated by Juul stockholders other than Altria, once it gets antitrust clearance from the U.S. Federal Trade Commission, according to the statement. The board will also add a nominating committee and a litigation oversight committee upon that clearance, it said.
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