Altria Group Inc. has delivered another shakeup to the tobacco industry, this time Monday confirming industry speculation that it would pay $2.75 billion in cash to take full ownership of No. 3 U.S. electronic cigarette NJoy.
Altria cleared the way for the NJoy purchase Friday by exiting its minority stake in No. 2 e-cigarette Juul while acquiring global licensing rights.
Multiple media reports, first by the Wall Street Journal, disclosed Altria’s plans to buy NJoy, which has a miniscule U.S. market share compared with top-selling Vuse of R.J. Reynolds Vapor Co. and Juul.
According to the most recent Nielsen report on convenience store tobacco sales, NJoy had a 3.7% market share.
Meanwhile, Vuse was at 41.5%, while Juul was at 26.4%.
The deal could be worth another $500 million in cash to NJoy if it can gain Food and Drug Administration authorization for certain products.
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In April, the FDA authorized NJoy Ace styles through its premarket tobacco product application pathway: its closed e-cigarette device and three accompanying tobacco-flavored e-liquid pods — Classic Tobacco 2.4%, Classic Tobacco 5% and Rich Tobacco 5%.
Altria said Ace styles represent 85% of NJoy’s 2022 total retail shipments.
“We believe we can responsibly accelerate U.S. adult smoker and competitive adult vaper adoption of NJoy Ace in ways that NJoy could not as a standalone company,” Billy Gifford, Altria’s chief executive, said in a statement.
NJoy products would be available in Altria’s national distribution network of more than 200,000 retail stores alongside top-selling traditional cigarette brand Marlboro, as well as increasing tobacco consumers’ awareness of NJoy through marketing.
“We believe the strengths of our commercial resources can benefit adult tobacco consumers and expand competition,” Gifford said.
“Our research indicates that once adult smokers and adult vapers try Ace, it performs on par with the leading e-vapor brand.”
Juul connection
On Friday, Altria announced it had “exchanged our entire minority (35%) economic investment in Juul Labs Inc. for a non-exclusive, irrevocable global license to certain of Juul’s heated tobacco intellectual property.
In September, Altria cleared the way to re-enter the e-cigarette marketplace after choosing to permanently end its non-compete agreement with Juul.
“We believe exchanging our Juul ownership for intellectual property rights is the appropriate path forward for our business,” Gifford said Friday,
When Altria paid $12.8 billion in December 2018 to acquire its 35% ownership stake in Juul, the e-cigarette manufacturer held a dominant U.S. market share of more than 70%.
As part of the investment, Altria discontinued production of its electronic cigarette NuMark, which had struggled to gain traction among vapers. Altria agreed to not develop and market its own e-cigarettes products for up to six years as long as Altria is providing services to Juul Labs.
In January 2020, Altria reduced its investment value to $4.2 billion as of Dec. 31, 2019.
On July 28, Altria disclosed it had written down its investment value in Juul Labs to an estimated fair value of just $450 million. At $450 million, the investment value is just 3.5% of the original Altria expenditure.
On Friday, Altria further wrote down the investment value to $250 million.
“Juul faces significant regulatory and legal challenges and uncertainties, many of which could exist for many years. We are continuing to explore all options for how we can best compete in the e-vapor category.”
In recent months, the shadow of a potential banning of Juul Labs Inc.’s e-cigarettes from U.S. retail shelves, as well as a potential Juul Labs federal bankruptcy filing, has accelerated the market-share gains of Vuse.
Bowman Gray IV, a local independent stockbroker, said that Altria disposing of its stake, “while helpful to offset tax liabilities, will be a big pill to swallow with over $12 billion in losses.”
Game-changer?
Barclays analyst Jain Gaurav said that considering Vuse sales has yet to turn an overall profit for British American Tobacco Plc, “a better-capitalized NJoy would be a bigger competitive threat to Vuse Alto.”
“We believe BAT would need to capture as much market share as possible before any potential deal could complete.”
David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies, said “many of my public health colleagues are decrying this potential takeover as further consolidation of the nicotine business in the hands of big tobacco.”
“Yet, none of them have any record of ever seeking to give NJoy or any other independent company any sort of marketplace advantage,” Sweanor said.
“The consolidation of the new nicotine market by the cigarette companies is at odds with a long history of disruptive technology destroying the previously dominant companies in a marketplace.”
Gray said that Altria buying NJoy “would undoubtedly make them more competitive in the e-cigarette business, though it will take some time to recover the $2.75 billion.”
Gray said Altria would have to “be aggressive (with) marketing and product expansion to move beyond the current annual sales of $150 million.
“At a buyout premium 18 times annual sales, this is another very costly attempt to establish itself in the e-cigarette space.”
Altria said it would pay for the cash transaction through “strong access to the credit markets and committed short-term bank financing.
“Additionally, we entered into a $2.7 billion transition agreement last year with Philip Morris International Inc. for the IQOS tobacco heating system.
“We received a $1 billion payment from PMI in the fourth quarter of 2022 and expect to receive a payment of $1.7 billion (plus interest) from PMI by July 15.”
Gaurav said that Altria could lose $500 million annual on EBIT (earnings before interest and taxes) on its NJoy push.
“Per our math, BAT lost $300 million to $400 million in U.S. e-cigarette EBIT in fiscal 2021 when its market share was 30%. NJoy’s market share is 3% today.
“If Altria wants to make NJoy successful enough so that its e-cig market share becomes somewhat respectable vis-à-vis its (Marlboro) market share of 45%, it will have to spend very aggressively.
“Hence, we think Altria will likely budget $500 million in annual NJoy losses for years to come.”