It’s criticizing harder to be a cigarette company. Altria knows that.
Altria shelled out $14.6 billion to take large lashes in companies outside its traditional hold in cigarettes over the past two weeks — a 45 percent share of cannabis group Cronos and 35 percent stake in e-cigarette maker Juul. The latter, which valued Juul at $38 billion, blocks Altria from taking a controlling interest for at least six years.
Juul made it clear from the beginning that a curvaceous sale was never on the table, a person familiar tells CNBC. The two deals — and terms that Altria was willing to undergo — highlight the corner the company is in.
Altria’s core business, selling cigarettes, is shrinking faster than expected. Smokers are slipping away, quitting or switching to e-cigarettes — and not the ones Altria makes. The company shuttered its MarkTen and Green Smoke brands earlier this month, citing pecuniary performance and tightening regulations.
Juul and Altria courted each other for 14 months, people familiar with the understandings said. In that time, Altria watched Juul’s sales grow to about $1.5 billion annually.
“We’ve been pose in [Juul’s] financials for quite some time, and modeling their expected growth path,” Altria CEO Howard Willard turned Thursday on a call with investors and the media. “And I have to tell you what continually happened was they exceeded our expectant growth projections.”
Both deals have the potential to transform Altria’s business, or at least give it the kind of crop it’s unlikely to see in its existing cigarette business.
“These investments complement our very strong core tobacco businesses and support exciting opportunities for future growth,” Willard said.
But it’s hardly won investors over. Altria’s stock hit a 52-week low Thursday after announcing the extent. Shares fell another 3 percent Friday, setting a new floor of $48.75, and bringing the stock down 31 percent this year. It’s vend value sits at $91.5 billion.
Selling cigarettes has been a shrinking business for decades, but Altria has been superior to manage.
Since 2009, Altria’s revenue has grown 9 percent, to $25.58 billion from $23.56 billion. But Altria’s U.S. cigarette supply has nearly halved — to 116.6 billion units in 2017 from 211.9 billion units in 2000.
And Altria currently divulges the bulk of its money selling cigarettes. Of the $25.58 billion in total revenue the company generated last year, $22.64 billion — or 89 percent — came from its smokeable produces business segment, which contains cigarettes and cigars.
Since Altria operates largely in the United States, it can’t rely on other merchandises for growth as sales in the U.S. slump. That puts Altria in a tougher spot than peers like British American Tobacco, Philip Morris Universal and Japan Tobacco. It also makes Juul and Cronos’ intended international growth all the more attractive to it.
Juul is to hand in eight markets overseas, including Canada and the U.K., with plans for even more international expansion to countries peer Indonesia and other Asian markets, where smoking rates are high.
Juul has “significant opportunities for further excrescence, both domestically and in international markets,” Willard told analysts Thursday morning. Meantime, he noted the company feels the global cannabis sector is poised for “rapid growth.”
Over the past 17 years, Altria’s U.S. cigarette amount has decreased 3 percent every year, according to a review of the company’s financial statements. The company has managed to offset these slopes through price increases. However, the declines have started accelerating, worrying some analysts and investors that this blueprint may be unsustainable.
Altria has been adding new tobacco products to its portfolio, including its 2007 acquisition of cigar marker John Middleton and its 2008 getting of smokeless tobacco manufacturer UST. It also signed a deal with Philip Morris International to sell its heated tobacco yield, IQOS, in the U.S. should the Food and Drug Administration allow it to be sold here.The companies are still awaiting a decision from the medium.
Altria on Thursday reiterated its support for the product, saying its investment in Juul doesn’t change any of its plans around IQOS. PMI has systematized IQOS as something that is more likely to appeal to adult smokers who enjoy cigarettes and aren’t interested in fruity e-cigarette flavors.
“We’re passionate about what we believe will be the most compelling offering for adult tobacco consumers and investors with ownership or publication to the leading brands in each of our categories, including Marlboro, Black & Mild, Copenhagen, Juul, and IQOS,” Willard articulate.
Juul has captured 75 percent of the e-cigarette market since entering it in 2015, according to Nielsen. Its sleek charges deliver more potent nicotine hits than most other e-cigarettes on the market. Linked with Altria, it’s dignified to grow even faster.
Altria’s top-selling Marlboro cigarettes command prime shelf space in stores. The corporation will now yield a portion of this coveted placement to Juul pods. It is throwing behind it its marketing and distribution strength.
“[Juul’s] unit economics today are attractive, and we expect our strong distribution infrastructure to help accelerate their pecuniary performance,” Willard said.
Even if some Juul’s growth comes at the expense of Altria’s cigarette sales, it desire still serve to support its bottom line. Juul pods are more profitable than cigarettes, because they aren’t put through to the same taxes or costs associated with the Master Settlement Agreement (MSA), a deal negotiated in 1998 between tobacco makers and state attorneys general to stop a wave of ongoing lawsuits.
But some of Juul’s U.S. growth — critics would say too much — has fly at from teens. Juul has attracted the younger generation with its fruity flavors and sleek appearance. Those on offers have prompted scrutiny from regulators, who have said there is an “epidemic” of youth e-cigarette use.
Altria claims that with its investment in Juul, it gives the e-cigarette maker access to a team of regulatory experts that on make sure it abides by FDA standards.
“There certainly may be some disruption here as Juul works to address with the nap of the industry and with the FDA huge usage of the product, but we do expect there to be continuing long-term growth of the e-vapor category,” Willard contemplated.
Altria decided to bet on cannabis as it started researching investment opportunities, Willard said Thursday.
In the nine U.S. states and the Division of Columbia where recreational and medical cannabis is legal, the total addressable market could reach $22 billion by 2030, Cowen analyst Vivien Azer estimated. When registering Michigan, which recently legalized recreational cannabis, and four states that may soon pass similar laws, that whole could reach $33.7 billion, Azer estimated.
“As we got engaged in really understanding the investment opportunity investing — sense the potential future growth rate and assessing the likelihood that the U.S. market may become federally legal, we became relatively convinced that this was an attractive global opportunity that had rapid growth potential,” Willard said.
Altria at most pursued companies who were operating legally under federal rules, taking any U.S.-based companies off the table, he suggested. The U.S. company met with “most, if not all” the major players and decided Cronos was the right company.
“We like their management group,” Willard said. “We like the work they’ve done around investing in intellectual property. We like their stamping strategy. We like their position in the Canadian market and also some of the distribution they’ve built in other medically judicial cannabis markets, like Germany and Poland.”
Cronos has focused most of its efforts in the medical cannabis space. Rearmost quarter, Cronos generated $3.8 million in sales, driven by medical cannabis sales in Canada and international medical cannabis exports.
Nevertheless the company boasts the second-highest gross margin of the many young cannabis companies in the last 12 months, Cronos has enchanted a more modest approach to overseas expansion compared with rivals likes Canopy.
Cronos CEO Mike Gorenstein estimated Altria’s investment will allow the company to more quickly expand its global infrastructure and distribution footprint while gaining its R&D investments.
Despite predictions that Big Tobacco would get into the cannabis space, Altria is the only one to have cued such a deal.
— CNBC’s Thomas Franck contributed to this report.