Tobacco giant invested $12.8 billion in Juul, taking a 35 percent stake in the e-cigarette maker that valued it at $38 billion as they begin to embark on a new path that relies less on traditional cigarettes.
The all-cash deal announced Thursday has drawn criticism for Juul, which has positioned itself as an enemy of Big Tobacco.
"We are taking significant action to prepare for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes by investing $12.8 billion in Juul, a world leader in switching adult smokers," Altria CEO Howard Willard said in a statement. "We have long said that providing adult smokers with superior, satisfying products with the potential to reduce harm is the best way to achieve tobacco harm reduction."
He said it's Altria's biggest investment "toward that goal." The tobacco maker's shares fell 2.5 percent in morning trading.
Juul, which split from parent company Pax in 2017, captured 75 percent of the e-cigarette market in just three years, with most of the growth coming in the past year. Juul has about $1.5 billion in revenue, according to people familiar with the matter because the information is confidential. The entire category has posted $2.95 billion in sales in the year ended Dec. 1, according to Nielsen data compiled by Wells Fargo analyst Bonnie Herzog.
The deal ends 14 months of on-and-off negotiations, according to the people. It marks a turning point for Juul and shows how much has changed for the company in a little over a year. It markets its vapor pods as an alternative to combustible cigarettes, which are responsible for killing about half a million Americans every year. But Juul, the leading e-cigarette maker, has come under criticism because of a surge in use by high school students. It is widely thought these teens would never have smoked but are being introduced to addictive nicotine by vaping.
As part of the deal, Altria agreed to give Juul top-shelf space so Juul pods are displayed alongside Altria's Marlboro cigarettes. It will also help Juul with its distribution and logistics, including through Altria's sales organization that covers about 230,000 retail locations.
The agreement holds Altria to a "standstill agreement" that prohibits it from acquiring more than a 35 percent stake or selling off its Juul shares within six years from closing. Juul will remain an independent company, though Altria will be allowed to appoint enough directors representing one-third of Juul's total board, the companies said.
The deal will also likely help Juul navigate some dicey regulatory waters. Federal health officials have cracked down on Juul's use of fruity flavors, which they say encourages teen use. The Food and Drug Administration has scrutinized Juul's marketing practices and appealing nature to kids. The agency conducted a surprise inspection of the company's San Francisco headquarters in September.
Altria also agreed to pay a $2 billion bonus to Juul. The e-cigarette company plans to share it with its 1,500 workers, averaging about $1.3 million each, people familiar with the matter said.
The bonus is being paid out as a special dividend as part of the deal. How much employees get depends on a number of factors, including how long they've been with the company and how much stock they own, one of the people briefed on the terms said.
Public health officials, including FDA Commissioner Scott Gottlieb and Surgeon General Jerome Adams, have called youth e-cigarette use an epidemic and have blamed Juul for it.
With this pressure, Juul has started facing some of the same regulatory and financial pressures that Big Tobacco has dealt with for decades. Altria brings with it lobbying and legal expertise that could help Juul as it comes under increased federal scrutiny.
"We understand the controversy and skepticism that comes with an affiliation and partnership with the largest tobacco company in the US. We were skeptical as well," Juul CEO Kevin Burns said in a statement posted on Juul's website. "But over the course of the last several months we were convinced by actions, not words, that in fact this partnership could help accelerate our success switching adult smokers."
Criticism of the deal was swift. Campaign for Tobacco-Free Kids President Matt Myers called the combination a "truly alarming development for public health."
"There is no longer any question that Juul has been the driving force behind the skyrocketing youth e-cigarette epidemic that has teens and families across the country struggling to deal with nicotine addiction," Myers said. "Juul's growth has been powered by its success in addicting kids, and the company's owners have just become billionaires as a result."
Altria provided investors with some updated financial guidance in the announcement. It warned that its full-year adjusted earnings per share will be slightly below the low end of its long-term 7 to 9 percent adjusted earnings because of the debt it's incurred from its investments in Juul and Canadian cannabis company Cronos.
Altria invested took a 45 percent stake in Cronos for $1.8 billion. Both investments comes as cigarette sales fall at a faster clip than anticipated, threatening Altria's usual tactic of raising prices to offset sales declines.
Some analysts have speculated whether its investment in Juul changes Altria's relationship with Philip Morris International, the company it spun off in 2008. The two have an agreement for Altria to commercialize PMI's new heated tobacco product, IQOS, in the U.S. if the FDA clears it. And PMI currently sells Altria's e-cigarette brands internationally.
Since the separation, Altria has operated largely in the U.S., while PMI has focused overseas, meaning the two companies haven't directly competed. Juul's products are already sold in eight markets overseas.
PMI CEO Andre Calantzopoulos said the deal with Juul doesn't change Altria's agreement to sell IQOS products should it receive FDA approval.
"Any development that genuinely results in more choices becoming available for the more than 1 billion men and women who smoke today and moves the world closer to eliminating the cigarette should be applauded," he said.