Altria (MO) Confirms Deal With JUUL, Unveils Savings Plan

Altria Group, Inc. (NYSE:MO) put speculations to rest by confirming the deal with renowned e-cigarette maker JUUL Labs Inc. Per terms of the agreement, which was signed and closed by the companies yesterday, Altria has acquired 35% stake in JUUL for $12.8 billion. The deal was financed by Altria primarily through a term-loan facility. In addition to this, the company revealed savings initiatives and commented on long-term views and strategies. Let’s take a closer look at these latest developments.

JUUL to Adorn Altria’s Portfolio

The deal entails restrictions that Altria cannot acquire additional shares of JUUL. This limits the company from attempting a takeover. Also, Altria has agreed not to sell or transfer its stake in JUUL for six years. Further, the company will be able to appoint directors, representing up to one-third of JUUL’s board.

Most importantly, through this service agreement, Altria will be able to utilize JUUL’s advanced technical capabilities in e-cigarettes arena. JUUL, renowned for advanced and highly differentiated e-vapor products, is rapidly growing in market share. The brand is currently present in almost eight countries and is committed toward innovation along with plans to further expand its global presence. Further, the companies have agreed to work together toward combating youth usage of e-cigarettes. In fact, JUUL has already stopped selling flavored products in retail stores and has enhanced age-verification processes for online transactions.

Moreover, we note that investing in JUUL marks an important step in Altria’s long-standing commitment toward bolstering presence in e-cigarettes space. In fact, Altria plans to provide JUUL greater exposure among adult smokers by providing inserts in cigarette packs and extend logistics as well as distribution support for JUUL. Further, JUUL will be able to take advantage of Altria’s strong infrastructure as well as popularity in the tobacco and related products industry.

With such prospects, JUUL will undoubtedly be a worthwhile addition to Altria’s reduced risk products portfolio. We note that in the smokeless category, Altria’s flagship MarkTen and Green Smoke e-vapor products are performing well. Further, Altria’s marketing and technology sharing agreement with Philip Morris (NYSE:PM) , which is currently under FDA’s review, is likely to enable the companies to benefit from opportunities in the e-cigarette realm. Altria is also undertaking efforts to expand in the cannabis industry, evident from recent announcements to acquire stakes of the Canadian cannabis company, Cronos Group (NASDAQ:CRON) .

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Long-Term Views & Savings Plan

Along with partnership with JUUL, Altria also announced a cost reduction program to delivering savings of nearly $500-$600 million by the end of 2019. Amid efforts to minimize costs across several platforms, the program is aimed to reduce workforce and third-party spending. Further, savings from the program is expected to offset interest expenses associated with the financing of JUUL and Cronos. The company expects pre-tax charges associated with cost-reduction in the band of $230-$280 million, majority of which will be reflected in the company’s fourth-quarter results. Further, management kept its earnings guidance for 2018 intact.

Additionally, Altria is committed to long-term financial targets of achieving 7-9% growth in adjusted earnings per share (EPS) and to maintain a dividend payout ratio of almost 80%. However, the company currently expects fiscal 2019 bottom line to be slightly below the targeted EPS growth range, due to the investments allocated toward JUUL and Cronos. The company is expected to provide greater details regarding earnings view for 2019 along with fourth-quarter results.

Wrapping Up

Notably, Altria is struggling with declining cigarette sales volumes, thanks to FDA regulations and consumers’ rising consciousness regarding nicotine. Amid such hurdles, the company’s efforts to expand in other lucrative business areas are expected to offer some respite. Other tobacco companies such as British American Tobacco (NYSE:BTI) are also taking strides to expand in the realm. Coming back to Altria, we expect that such strategies can help this Zacks Rank #3 (Hold) company to revive the stock that has declined 10.4% in the past six months compared with the Zacks Investment Research