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Altria downplays concerns of Juul, Philip Morris smoke-free competition

Altria Group Inc. executives on Dec. 20 downplayed investor concerns that its $12.8 billion deal for a 35% stake in e-cigarette startup Juul Labs Inc. will position the companies in direct competition with a smoke-free heated tobacco device made by Philip Morris International Inc. that Altria could soon sell in the U.S.

While Juul is poised for growth both in the U.S. and abroad, the new deal should not affect a separate partnership between Philip Morris and Altria to launch a heated tobacco device named iQOS, which is awaiting approval from the U.S. Food and Drug Administration, Altria Chairman, CEO, COO & Executive Vice President Howard Willard said during an investor call.

Altria wants to make Juul its exclusive e-cigarette and sees international growth opportunities for the company, Willard said. The Marlboro-maker recently dropped its own e-cigarette brands in the face of regulatory pressure — also a concern raised by investors— and lost market share to Juul and other rivals.

But analysts pointed to Altria's partnership with Philip Morris as a possible conflict with Altria's new interest in Juul. The San Francisco-based Juul launched in the U.S. in 2015 and expanded to the U.K., Israel, Canada and Russia in 2018. Philip Morris, meanwhile, already sells iQOS in Canada, Russia, the U.K. and least 40 other countries.

Altria will market and sell iQOS in the U.S. while paying royalties to Philip Morris through an agreement between the two companies. The U.S. Food and Drug Administration has yet to approve Philip Morris' application, Willard confirmed during the call.

"We remain fully committed to commercializing iQOS to great success here in the U.S. And I think whether we were investors in Juul or not, they were going to be competing both in the U.S. and overseas," Willard said.

Philip Morris likewise does not view Altria's deal with Juul as affecting its own agreement for iQOS, spokesman Corey Henry said in an email to S&P Global Market Intelligence

"Any development that genuinely results in more choices becoming available for the more than 1 billion men and women who smoke today should be applauded," Henry said.

Investors and analysts are also concerned about potential impacts from the FDA's crackdown on e-cigarettes amid what the agency has said is a surge in use by minors. The FDA targeted Altria and Juul, among other companies, causing both to pull some fruit- and crème-flavored e-cigarettes from physical stores before Altria dropped its e-cigarette business altogether.

Minors likely are a small percentage of Juul's overall users, Willard said. Even so, Altria supports raising the legal age for using any tobacco product to 21, and both companies need to work to curb youth use of e-cigarettes, he said.

"If it's not resolved, it's going to put the whole category at risk, including for adult cigarette smokers," Willard said.

S&P Global Ratings on Dec. 20 dropped the tobacco firm's credit rating to BBB from A-. Altria is taking on $14.6 billion in new debt to finance the Juul and Cronos deals.

The downgrade reflects Altria's increased leverage and growing uncertainty for tobacco producers from the FDA's actions on e-cigarettes, according to S&P Global Ratings.

Executives declined to provide details about the privately owned Juul's financials and expected future returns to Altria from the investment. The deal, combined with a recently announced $1.8 billion investment in Canadian cannabis producer Cronos Group, and cost reductions expected to reap up to $600 million per year in savings, should be accretive to Altria's earnings in the second full year, Vice Chairman, CFO and Executive Vice President William Gifford said.

"We do expect to get an attractive return on invested capital. I don't have the timing or the amount on that. But I feel your desire for greater transparency and will go to work on that," Gifford said during the call.

Altria executives said they remained confident about the deal as analysts asked about the ratings drop.

"We expect the savings generated through the program to offset most of the expected interest expense increase in 2019. We remain committed to maintaining our investment grade credit rating," Willard said.

Shares in Altria dropped by 2.5% in afternoon trading Dec. 20 to $50.11 per share.

This S&P Global Market Intelligence news article contains information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. The original S&P Global Ratings documents referred to in this news article can be found here.