Wells Fargo’s Bonnie Herzog said in a note to clients that the latter move is a savvy one by Altria, and indicates that the company is close to sealing a deal to invest in venture capital-backed e-cigarette maker Juul Labs. The Wall Street Journal reported two weeks ago that the two companies were in talks regarding Altria taking a large minority stake in Juul, citing sources familiar with the matter. Juul was valued at $16 billion in its latest funding round over the summer.
Herzog wrote that the Cronos deal is “very positive as it expands its total addressable market, giving it another avenue of growth,” and that she “wouldn’t be surprised if an announcement to acquire JUUL is imminent and we continue to believe this would be very positive.” Herzog has a “outperform” rating on Altria’s stock.
Juul is facing growing public concern and regulatory scrutiny over its product’s appeal to children-flavors include “fruit” and “mango”-and announced in mid-November that it was suspending retail sales of flavored pods temporarily while it works on a new age-verification system. The company also said it would stop advertising on social media. Those voluntary moves came after the Food and Drug Administration Commissioner Scott Gotlieb said in September that he had “good reason to believe that [youth e-cigarette use has] reached nothing short of an epidemic proportion of growth,” and the agency seized documents from the company’s headquarters in October.
While neither management team commented on the WSJ’s report of a deal being in the works, Herzog said she expects Altria to invest between $4 billion and $7 billion for a 30%-40% stake in Juul. She estimates Juul has $2 billion in annual revenues. Longer term, Herzog thinks that a merger between Altria and Philip Morris International (PM) will take place, with “reduced risk” as a catalyst.
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