Marlboro maker set to invest in vaping, cannabis
By Jennifer Maloney and Allison Prang
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 8, 2018).
Altria Group Inc., faced with slumping cigarette sales and the
threat of new federal regulations, is placing some big bets in
search of growth beyond dominant its Marlboro brand.
On Friday, the biggest U.S. tobacco company said it would invest
$1.8 billion in a Canadian marijuana grower, pushing into a nascent
business that is illegal on the federal level in the U.S. but could
unlock international markets.
Altria also said it would discontinue its e-cigarette
alternatives to its familiar Marlboro, Virginia Slims and
Parliament cigarettes. Altria has been developing and marketing
e-cigarettes for years but failed to get traction with
consumers.
The tobacco company isn't giving up on the vaping business that
threatens to undermine its roughly $20 billion in annual cigarette
revenue. Altria is in talks to invest billions of dollars to take a
significant stake in Juul Labs Inc., acontroversial but
fast-growing San Francisco e-cigarette startup, according to people
familiar with the matter.
Although Altria dominates U.S. cigarette sales with 46% of the
market, the Richmond, Va., company is under pressure to shift
strategies because of the decline in adult smokers and a proposed
U.S. ban on menthol-flavored cigarettes. Its shares have declined
more than 20% this year.
It has been "an exceedingly challenging year as growth from
e-cigarettes, and Juul in particular, seem to finally be weighing
on cigarette consumption," Cowen analyst Vivien Azer said.
For years, Altria and its U.S. rivals have been able to boost
profits, despite falling cigarette volumes, by raising prices . But
the surge in e-cigarette sales over the past year threatens to
further shrink the pool of adult smokers and undercut cigarette
pricing.
For the year ended Nov. 17, Altria's cigarette volumes fell
4.5%, and the rate steepened to 7.6% in the most recent four weeks,
according to a Wells Fargo analysis of Nielsen data. Altria's
long-term cigarette volume forecast had been a decline of between
3% and 4%.
Altria CEO Howard Willard, in an October conference call,
attributed the accelerated decline to higher gas prices, which
reduce discretionary spending, and e-cigarettes' growing
popularity. "It's hard to tell how long it's going to persist," he
said of the slide. "I think we're going to have to wait and see
what happens with both gas prices...and whether or not the growth
rate of e-vapor slows down."
A significant investment in Juul, which has captured roughly
three-quarters of the U.S. e-cigarette market, would be one way to
counter the slide. It would come at a steep price: Juul, with
roughly $2 billion in sales, was valued at $16 billion in a funding
round over the summer.
Altria's own e-cigarette brands, MarkTen and Green Smoke, had
captured just a small slice of the market. On Friday, Altria said
it would take a $200 million charge to discontinue that business
and its Verve nicotine gum.
"We do not see a path to leadership with these particular
products and believe that now is the time to refocus our
resources," Mr. Willard said in a news release. He said the company
is still committed to e-cigarettes and other cigarette
alternatives.
Altria is awaiting Food and Drug Administration approval of a
heat-not-burn tobacco product called IQOS, which it hopes to market
in the U.S. in a partnership with Philip Morris International. The
companies say the device is less harmful than cigarettes.
Mr. Willard, a 26-year company veteran, took over as Altria's
chairman and CEO in May. He played a role in the company's 2009
acquisition of smokeless tobacco company UST Inc. and its 2007
acquisition of cigar maker John Middleton.
Altria's discussions with Juul have met resistance within the
startup, which pitches itself as an alternative to big tobacco but
has come under fire for the popularity of its fruit-flavored
products with teens. In response to a surge in underage use, the
FDA recently announced sharp restrictions on retail sales of such
products.
At Juul, some employees are concerned about a partnership with a
cigarette maker. At an all-hands meeting Wednesday, Juul's CEO said
the startup wouldn't do a deal that didn't align with its mission
of helping adult cigarette smokers switch to less harmful
products.
Meanwhile, Altria agreed Friday to pay $1.8 billion for a 45%
stake in Toronto-based cannabis company Cronos Group Inc. It grows
and sells medical and recreational marijuana products mainly in
Canada, with smaller medical growing and distribution operations in
such countries as Germany and Australia.
Altria and Cronos plan to work together to design vaporizers for
cannabis use, according to Cronos CEO Michael Gorenstein. He said
vaporizers are one of the fastest growing products in Colorado and
California, where pot is legal, and a vaping device is a priority
for both companies.
Canada legalized recreational pot sales in October, and a number
of other countries have legalized medical marijuana sales.
In the U.S., recreational marijuana is legal in 10 states and
medical marijuana is legal in more than 30.
Altria said the cannabis industry "is poised for rapid growth
over the next decade" and called cannabis "an adjacent category"
for its tobacco operations. Cronos had just US$7.5 million in
revenue for the nine months ended Sept. 30.
Cronos is one of several Canadian marijuana growers to attract a
big investment from established U.S. companies. In August, Corona
brewer Constellation Brands Inc. invested $4 billion to expand its
stake in Canopy Growth Inc., which is developing both medical and
recreational products.
Altria is paying C$16.25 for each Cronos share, a 40% roughly
premium to where the stock was trading last week. Altria has a
warrant to buy more Cronos shares at C$19 a share that would give
it control of the company with a total stake of 55%. Cronos's board
will be expanded from five directors to seven and Altria will get
to nominate four directors.
Jacquie McNish contributed to this article.
Write to Jennifer Maloney at jennifer.maloney@wsj.com and
Allison Prang at allison.prang@wsj.com
(END) Dow Jones Newswires
December 08, 2018 02:47 ET (07:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
Cronos (TSX:CRON)
Historical Stock Chart
From Mar 2024 to Apr 2024
Cronos (TSX:CRON)
Historical Stock Chart
From Apr 2023 to Apr 2024