Altria stock got a bump last week amid news that the company is in talks to acquire a minority stake of Juul. The speculation largely stems from a Wall Street Journal report citing “sources familiar with the matter,” but has gained a great deal of traction among Wall Street Analysts.
Juul Labs Inc., the privately owned vaporizer start up has made huge waves in the tobacco industry during its first few years in operation, making $942.6 million over the year ending on June 16. According to analysts at Nielsen data, Juul accounts for more than 75 percent of the overall e-cigarette market. While over the company’s three-year history, it has maintained its stance as an opposition to big tobacco and a healthier alternative for adult smokers, the recent talks with Altria stand in contrast to their previous statements.
“We’re the No. 1 e-cigarette in the United States,” said Juul’s Chief Administrative Officer Ashley Gould to the New York Times in April. “And we’re not a big tobacco company. We’re an independent company.”
A deal with a big tobacco company like Altria is still very tentative, according to news reports. While it would conflict with Juul’s current corporate branding, it could be mutually beneficial. Altria would gain their much-needed exposure to the e-cig market, and Juul would benefit in dealing with the FDA.
If a deal does occur, it won’t be cheap for Altria. Juul was valued at $16 billion in its most recent round of funding. Acquiring a 20-30 percent stake in Juul Labs would cost Altria between $4 and $7 billion at the current valuation. It’s doable for the cigarette company, according to analysts, especially considering Altria’s free cash flow and strong balance sheet.
Given the shifts in the tobacco market, and Altria’s lagging adoption of new trends, the company would certainly benefit from picking up stake in Juul, according to a number of analysts.
“This would be the absolute right decision for MO given where we think the reduced risk industry is heading & because Juul is the ‘IT’ brand,” said Bonnie Herzog of Wells Fargo. “Furthermore, we think MO would be a great partner for Juul since it would help Juul better navigate the regulatory landscape.”
The deal isn’t without complications. Altria’s IQOS project, in which they are partnered with Phillip Morris, stands as a nearly direct competitor with Juul. While IQOS has seen large-scale adoption overseas, the “heat not burn” device has been wavering in the states.
“If Altria really believes in IQOS, and is committed to giving it as much shelf space as possible, we would question the logic of taking a stake in a company that could be impacted by heated growth,” wrote Jefferies analyst Owen Bennett in a note, also stating that he would “not be surprised” if the deal were to occur.
Since last month’s news of a proposed ban on menthol cigarettes, Altria stock has been discounted by over 6 percent, and has seen a slight downturn from the small bump following Wednesday’s report. Altria is a dividend stock. At a current 5.96 percent yield and trading at its lowest levels from the past three years, Altria should be a definite buy for any investor.