Government Orders Altria To Unwind Investment In Juul Labs
Diversification Turns To Debacle For Tobacco Giant
Altria, the big tobacco giant, formerly known as Philip Morris, has struggled to diversify and adapt to shifting consumer preferences in an evolving market. Following the troubled rollout of their proprietary IQOS device, the Federal Trade Commission has now ordered the company to unwind it’s $12.8 billion investment in former competitor Juul Labs.
The FTC alleges that the companies had entered into a series of agreements that eliminated competition, a violation of antitrust laws. The complaint also contends conspiracy between the two competitors and directly extends to Altria’s acquisition of a 35% stake in Juul Labs.
Altria has expressed disappointment with the FTC, stating that they will fight the decision and defend their investment in court. However, some analysts are cautioning that it may be in the best interest of Altria to proceed with the FTC’s orders.
The investment proved troubling for Altria not long after the acquisition, with Juul labs consistently failing to meet investor expectations. The company’s value had tanked following a series of lung injuries misattributed to vaping, as well as several lawsuits challenging their marketing practices.
The Federal Trade Commission filed an administrative complaint which alleges Altria Group and Juul Labs entered a series of agreements, including Altria’s $12.8 billion investment in Juul, that effectively eliminated competition in direct violation of federal antitrust laws. The FTC alleges that Altria agreed to not compete against Juul in the e-cigarette sector in exchange for a sizable investment in return.
In their complaint, they allege that Altria folded its own e-cigarette venture and made a non-compete deal for up to six years. “By the end of 2018, Altria orchestrated its exit from the e-cigarette market and became Juul’s largest investor,” stated Ian Conner, director of the FTC’s Bureau of Competition. “Altria and Juul turned from competitors to collaborators by eliminating competition and sharing in Juul’s profits.”
While Altria has stated that they will contest the decision and defend their investment in court, some analysts caution that it may not be the best move for the group. They note that Altria has already written off $8.6 billion worth of the initial valuation thus far, with Juul Lab’s value only continuing to plummet in the market.
Investors and analysts see this an opportunity for Altria to offload a troubled investment and better position themselves in an unstable market, Poor investments appear to be an unfortunate trend for the group, following the failed $1.8 billion acquisition of a 45% stake in the cannabis company Cronos, now only worth $800 million.
Bad press from companies such as Juul Labs has shifted the general public perception about vaping in a negative direction. Meanwhile, research from King’s College London found that misinformation has led to ill-founded beliefs that vaping is more harmful than smoking, which goes against the currently accepted scientific consensus.
Vaping has not only been shown to be less harmful than smoking, but the most effective way to help quit as well. A study from the University of Louisville found that vaping was the most effective form of smoking cessation, more so than quitting cold-turkey or even prescription options.
Vaping has been responsible for helping thousands, and potentially millions of adult smokers quit each year. Research from University College London found that vaping helped up to 70,000 British smokers quit in the year 2017 alone.
As mentioned, in addition to being an effective smoking cessation aid, vaping has repeatedly been proven as less harmful than smoking as well. For example, a study from the Roswell Park Comprehensive Cancer Center found that vaping was a staggering 93% safer than smoking.
Noting that the trial isn’t set to begin until early 2021, which may be even further delayed given our current situation, it will be unlikely to see a definitive ruling anytime soon. In the meantime, this creates doubt and uncertainty surrounding the value of Altira, and it’s stock.
While analysts note certain advantages for Altria in stepping away from Juul labs, the decision poses a number of challenges as well. Unwinding the investment would leave the company with no vapor products, and also undermines the company’s stated goal of leading smokers toward non-combustibles.
There is no clear strategy laid out as to how exactly the deal can even be unwound. Regardless, if Altria were ultimately forced to divest their stake in Juul, it would unlikely impact share performance and may even be a welcome sign for investors.
What are your thoughts regarding the FTC’s lawsuit calling for Altria to pull out of their investment in Juul? Was this a wise investment for the group in the first place? We would love to hear from you in the comments below, be sure to like us on Facebook and follow us on Twitter to receive all the latest vaping news!
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