S&P Global Ratings and Fitch Ratings on Dec. 20 cut their credit ratings on Altria Group Inc. after the tobacco giant acquired a 35% stake in e-cigarette maker Juul Labs Inc. for $12.8 billion.
S&P downgraded Altria's issuer credit rating to BBB from A-, citing the company's plan to finance its investment in Juul, as well as its recently announced $1.8 billion investment in cannabis producer Cronos Group Inc., entirely with debt.
The rating agency said it does not believe Juul or Cronos will provide significant near-term investment returns to Altria.
S&P said the downgrade also reflects pressure from state and local regulators and the U.S. Food and Drug Administration, which has been targeting the sale of menthol cigarettes and flavored e-cigarettes in recent months.
"We believe recent statements by the FDA in response to increased youth usage of e-cigarettes makes Juul's long-term value a relative unknown," S&P said.
Fitch also downgraded Altria's long-term ratings to BBB from A-, citing the increased debt as a result of the Juul deal.
Fitch said the Juul and Cronos investments increase pro forma leverage to approximately 2.7x from 1.3x at the end of the third quarter of 2018.
S&P and Fitch kept Altria's outlook at stable. S&P said the stable outlook reflects its view that Altria's core tobacco business will continue to generate modest profit growth through price increases and savings from its cost reduction initiatives.
Fitch said the stable outlook reflects Altria's leading position in the international tobacco industry, excluding the U.S. and China, with a global market share of 24%.
In contrast, Moody's affirmed Altria's A3 senior unsecured long-term and Prime-2 commercial paper ratings, pointing to the company's strong earnings and cash flow, as well as its conservative capital structure.
The rating agency said it also reflects the company's "solid strategic focus on providing different types of tobacco products that satisfy consumer preferences."
Moody's revised Altria's outlook to negative from stable.
S&P said it could raise Altria's ratings if the company demonstrates a commitment to deleveraging and if its debt-to-EBITDA ratio improves. Further large debt-financed acquisitions would likely lead to "meaningful deterioration" in Altria's credit metrics, S&P said.
Fitch said that if Altria's recent investments manage to offset a decline in the group's traditional tobacco categories, Juul and Cronos could improve Altria's competitive position by materially diversifying cash flow streams and providing access to significant growth opportunities in key international markets.
Altria Chairman, CEO, COO and Executive Vice President Howard Willard told investors Dec. 20 that Altria wants to make Juul its exclusive e-cigarette. Investors are concerned that Altria's deal with Juul could be in conflict with the company's recent agreement to sell Philip Morris International Inc.'s smoke-free heated tobacco device iQOS in the U.S. Willard downplayed such concerns, saying the company remains "fully committed to commercializing iQOS to great success here in the U.S."