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: Altria and Juul end noncompete deal: Here’s what that means for e-cigarette sales and marketing


Altria Group Inc. said Friday it has taken a step that extricates it from its noncompete arrangement with vaping company Juul Labs Inc., freeing both companies to pursue their own strategies.

In a regulatory filing, the tobacco giant

said it has exercised an option to be released from noncompetition obligations relating to its stake in Juul. The option included the right to terminate should the value of the investment fall below 10% of its initial carrying value of $12.8 billion. As of June 30, the stake was worth just $450 million.

Altria paid the $12.8 billion in 2018 to acquire a 35% stake in Juul, which was valued at about $35 billion at the time. The stake has steadily lost value as Juul has drawn regulatory scrutiny for flavors and marketing that were blamed for a spike in teenage vaping. In early September, Juul agreed to pay at least $438.5 million in a settlement with more than 30 states.

Altria is losing board-designation rights, among other changes, the company said. It can now only appoint one independent director, and to do that it must retain at least 10% ownership in Juul.

The company’s Juul shares have converted to single-vote common stock, “significantly reducing our voting power,” according to the filing. Juul is now free to sell itself to another tobacco company or go it alone, while Altria can invest in another vaping company or develop its own products.

In 2017, Juul catapulted to the top of the e-cigarette market. But the company’s valuation fell just as quickly as a series of crises led to hundreds of lawsuits alleging that the company marketed its products to teens. Photo Illustration: Jacob Reynolds/WSJ

Analysts were divided on what’s next for either company.

Bernstein said it had been expecting the move for a number of months, ever since Juul was told by the Food and Drug Administration in June that it could no longer market its e-cigarettes in the U.S. under a marketing-denial order, or MDO. The regulator stayed that order in July and said it would continue its review of the company’s products.

Read now: FDA bans Juul vape products and orders all current ones to be removed from market

“We expect that Altria may now look to divest its Juul stake, crystallizing the $12+bn loss on its investment for tax purposes,” Bernstein wrote in a note to clients. “We expect that the realization of this tax loss could then accelerate the divestiture of Altria’s stake in ABI (Anheuser-Busch International

), with the loss on the Juul investment fully offsetting the significant gains on Altria’s stake in ABI, and potentially saving Altria around $2 billion in tax liabilities.”

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Bernstein said there were few good opportunities for Altria among existing vaping companies and suggested that privately held NJOY is “likely the best of a bad bunch.” Bernstein has a market-perform rating on Altria with a $45 stock-price target, which is about 10.5% above the current price.

At Jefferies, analyst Owen Bennett said he expects Altria to retain its 35% stake in Juul and said there’s the potential for “material upside.” He said he expects the company to ultimately get the FDA marketing-denial order overturned and to expand internationally.

“Also potentially supporting upside is the possibility of a future Juul IPO, or even another big tobacco bid (yet we think this latter option is very unlikely),” Bennett wrote in a note to clients. “We currently value the Juul stake in published MO price target at $10bn.”

Jefferies rates Altria a buy with a $53 price target.

See also: FDA issues plan to ban menthol in cigarettes and cigars

Vivien Azer at Cowen said Altria could take advantage of the move to build out its limited exposure to reduced-risk products (RRP), a new category in the tobacco sector consisting of products that are potentially less harmful to consumers.

Altria’s 2018 Juul deal meant its only RRPs were Juul’s vapes and its IQOS smoke-free tobacco product, which is marketed in the U.S. by Philip Morris International
The IQOS product was the subject of a patent dispute with R.J. Reynolds that led to a ban on imports into the U.S. last year.

Altria in turn sued R.J. Reynolds over patents used in the latter’s Vuse line and was awarded a payment of more than $95 million by a North Carolina jury earlier this month.

“Given Altria’s limited success in developing products organically, and the time necessary to create a product and file a PMTA (Premarket Tobacco Product Application), we think it’s more likely that Altria will seek to buy its way back into the e-cigarette category (which represents 7% of U.S. nicotine sales),” said Azer.

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

Altria shares were down 1.1% Friday and have fallen 14% in the year to date, while the S&P 500

has fallen 24%.

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