Tobacco giant Altria Group Inc. said Dec. 20 that it signed and closed a $12.8 billion investment with e-cigarette maker Juul Labs Inc. for a 35% stake in the company.
As expected, the deal values San Francisco-based Juul at $38 billion. The Marlboro-maker is investing in the U.S. market leader in e-vapor products shortly after announcing that it would stop making its own MarkTen and Green Smoke e-cigarettes.
"We are taking significant action to prepare for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes by investing $12.8 billion in Juul, a world leader in switching adult smokers," said Howard Willard, Altria's chairman and CEO.
"We have long said that providing adult smokers with superior, satisfying products with the potential to reduce harm is the best way to achieve tobacco harm reduction. Through Juul, we are making the biggest investment in our history toward that goal," Willard added.
Altria has initially acquired nonvoting shares, which will be converted to voting shares once antitrust approval is received. Altria will then be able to appoint directors comprising one-third of Juul's board. The tobacco giant has also committed to not to sell or transfer shares for the next six years.
Juul will become Altria's exclusive e-cigarette brand. The two parties have entered into a service agreement through which Altria will provide shelf space for Juul's menthol and tobacco-based products, though its flavored products will continue to be sold exclusively online. The company will also offer Juul access to its infrastructure and logistics services.
Juul and Altria will work together to prevent underage vaping by implementing brick-and-mortar and online strategies, such as improved age verification and withdrawing flavored products in stores.
In a statement, Juul CEO Kevin Burns acknowledged that Altria was an "unlikely — and seemingly counterintuitive — investor," but said the tobacco company supports Juul's mission and will provide services to help expand Juul's reach, including through inserts in cigarette packs. The standstill agreement means that Juul would continue to operate independently, Burns added.
Altria funded the deal with a $14.6 billion term loan facility arranged by JPMorgan Chase & Co. The company said it may use the outstanding $1.8 billion to fund its recent investment in cannabis business Cronos Group Inc..
In the announcement, the cigarette-maker also said it expects its full-year adjusted EPS to be slightly below the low end of its long-term 7% to 9% adjusted earnings, following its investments in Juul and Cronos. It will also begin a cost-reduction program to achieve $500 million to $600 million in annualized cost savings by the end of 2019. The program is expected to offset most of the interest expenses incurred by financing the Juul and Cronos deals.
Perella Weinberg Partners LP and J.P. Morgan Securities LLC acted as financial advisers to Altria. Wachtell Lipton Rosen & Katz and Hunton Andrews Kurth LLP provided legal counsel.
Goldman Sachs served as financial adviser to Juul, while Pillsbury Winthrop Shaw Pittman and Cleary Gottlieb Steen & Hamilton provided legal advice.
In late morning trading, Altria's shares were down 2.7% at $50.01.