Breakingviews – Altria starting to look like the bad tobacco bank

Marlboro cigarette packages are displayed for sale at a convenience store in Somerville, Massachusetts July 17, 2014. REUTERS/Brian Snyder

NEW YORK, June 22 (Reuters Breakingviews) – Smoke doesn’t always go up. Altria (MO.N), the maker of Marlboro cigarettes, lost about $7 billion of market capitalization on Wednesday as investors processed the unmistakable whiff of a government crackdown. The $75 billion company is starting to look like the riskiest parts of the tobacco industry, rolled into one package.

Altria was spun off from Philip Morris International (PM.N) in 2008 to contain its exposure to the US market. Before, the main risk in that market was lawsuits, but now it’s government intervention. The Joe Biden Administration said Tuesday would forcibly reduce the amount of nicotine in cigarettes. Worse yet, the Food and Drug Administration is thinking of banning E-cigarettes made by Altria’s partner Juul, for which the Marlboro maker paid $12.8 billion for a 35% stake in 2018.

Juul was in deep trouble, but investors still attributed some option value to it. Altria itself had downgraded its investment to $1.6 billion as regulatory setbacks and negative publicity about teen vaping and lung damage piled up. However, the drop in the company’s value on Wednesday, more than four times that amount, suggests that embers of optimism still burn.

Altria now has a strategic problem. Juul was his best bet to branch out and move away from American cigarettes. A partnership with its brother Philip Morris International to sell the IQOS smokeless device fell through and the product was pulled from US shelves and with a 48.1% share of the US retail cigarette market, Altria has a lot to lose if nicotine restrictions really end up curbing smoking, something that has yet to be proven in any way.

If there’s one silver lining to come out of this, it’s that Altria could escape an agreement it had with Juul not to enter the vaping market on its own. If Altria pays off its investment in Juul by 90%, and from your most recent trimester, amortizations stand at 87.5% – the non-competition agreement is annulled. Altria’s smokeless ambitions may yet rise from the ashes, at least in some form.

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CONTEXT NEWS

– On June 21, the US Food and Drug Administration said it would move forward with drafting proposed rules to lower the maximum level of nicotine allowed in cigarettes.

– The FDA is also preparing to potentially ban Juul Labs e-cigarettes from the US market, according to a June 22 Wall Street Journal report. Altria partnered with Juul through a $12.8 billion investment in December 2018, receiving a 35% stake and agreeing not to compete with the company in the e-cigarette market.

Edited by John Foley and Sharon Lam

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