Tobacco companies including Altria have been investing in e-cigarettes as USA smoking rates decline, but those products have lost significant market share over the previous year as Juul's popularity has surged.
MO, +1.00% rallied 1.5% in afternoon trade Wednesday, to bounce off the previous session's 3 1/2-year closing low, after The Wall Street Journal reported that the cigarette seller was near a deal to take a 35% stake in e-cigarette startup Juul Labs Inc.
While the valuation that Altria's Juul stake implies may raise some eyebrows, King thinks it's a good sign for this new area of the market, as new products represent a way forward for an industry that has seen a decline in traditional cigarette use in the U.S.
The deal values the San Francisco-based company at US$38 billion and will put its products next to Marlboro cigarettes on American retail shelves. The cigarette maker also agreed not to sell the shares for six years, during which Juul will be Altria's only e-vapor business.
"We strongly believe that working with JUUL to accelerate its mission will have long-term benefits for adult smokers and our shareholders", the statement read.
There is a scramble in the U.S.to reverse a recent explosion in teen vaping that public health officials fear could undermine decades of declines in tobacco use. However, despite these risks, approximately two-thirds of JUUL users aged 15-24 do not know that JUUL always contains nicotine.
The agreement lays out requirements for Altria to make Juul products available at retail stores, and limits Altria's ownership stake to 35 per cent, enabling Juul to maintain control, Burns added.
Altria's shares fell as much as 3.6 percent in NY on Thursday to $49.57 as of 10:19 a.m., the lowest intraday level since August 2015. The company has said it wants to help smokers move to safer products, and is also developing a type of cigarette that uses warmed tobacco and that the company says delivers fewer toxins. Juul has enjoyed explosive growth and now dominates the e-cigarette market. It comes on the heels of its investment in Canadian cannabis company Cronos Group Inc. earlier this month. It will also help Juul reach smokers via cigarette pack inserts and mailings.
"Altria has no interest in reducing the number of people who smoke cigarettes", the group's president, Matthew Myers, stated.
The tobacco giant, which had revenues of $25.6 billion in 2017, plans $500 to $600 million in annual cost savings through job cuts and other measures.