Tobacco company is in talks with cannabis company and e-cig
startup Juul
By Jennifer Maloney
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 5, 2018).
Marlboro maker Altria Group Inc. is eyeing cannabis and
e-cigarettes, searching for growth outside its traditional
business, as the long decline of U.S. cigarette sales
accelerates.
The tobacco giant is in separate talks to make investments in
Canadian cannabis company Cronos Group Inc. and in San Francisco
e-cigarette startup Juul Labs Inc., according to Cronos and people
familiar with the Juul matter. The two companies would give Altria
access to new customers and overseas markets, but a deal with
either isn't imminent.
Altria is the U.S. cigarette market leader, but its share of the
fast-growing e-cigarette market is eclipsed by Juul, whose sales
represent three-quarters of the domestic vaping industry. Cronos is
the fourth most valuable publicly listed marijuana company with a
total valuation of about $1.9 billion.
Talks with both companies could be derailed by the baggage that
Big Tobacco brings.
Some Juul staff are upset after The Wall Street Journal reported
last week that the startup is entertaining selling a significant
stake to the tobacco company, a move they feel betrays Juul's
stated mission of helping addicted cigarette smokers switch to less
harmful products, according to current and former employees.
And Cronos might be reluctant to do a deal because it could
preclude other potential partnerships the cannabis startup might
forge with pharmaceutical, food or beverage companies. Cronos on
Monday confirmed that it was in early discussions with Altria,
noting that "there can be no assurance such discussions will lead
to an investment."
Altria and Juul declined to comment Tuesday.
Toronto-based Cronos Group grows and sells medical and
recreational marijuana products in Canada, with smaller medical
growing and distribution operations in such countries as Germany
and Australia. Canada legalized recreational pot sales in October
and a number of other countries have legalized medical marijuana
sales.
A deal would give Altria an opportunity to capitalize on those
overseas markets, as cigarette sales slow in the U.S. But it is
unlikely that the company would sell marijuana products in the U.S.
before cannabis is legalized nationwide. While recreational or
medical marijuana is legal in many U.S. states, it remains illegal
at the federal level.
Cronos in September unveiled a research project with
Boston-based Ginkgo Bioworks Inc. to study new techniques for
producing medical marijuana. One process under consideration is
creating CBD and other cannabinoids through a yeast fermentation
process that eliminates the need to grow plants.
Cronos's stock price jumped by nearly 16% this week after
Reuters reported on the Altria talks.
Closely held Juul, a three-year-old company with more than 1,000
employees, was valued at $16 billion in a funding round this
summer. Juul's sales have surged over the past year, even as it
contends with a crackdown by the Food and Drug Administration aimed
at curbing widespread use of its products by teens.
Altria represents 46% of the U.S. market for combustible
cigarettes. Its stock has declined more than 20% over the past
year, as the company has been buffeted by declines in traditional
smokers and a potential U.S. ban on menthols. The tobacco giant
still has a market value of more than $100 billion.
The U.S. cigarette industry has for years used price increases
to boost revenue and profits despite falling cigarette volumes. But
that decline has sped up in recent months to a level that some
analysts see as unsustainable. Altria's long-term cigarette volume
forecast had been a decline of between 3% and 4%. For the year
ended Nov. 17, its cigarette volumes fell 4.5%, a rate that has
steepened to 7.6% in the most recent four weeks, according to a
Wells Fargo analysis of Nielsen data.
Altria CEO Howard Willard in October on a conference call with
analysts acknowledged the sharpening decline, attributing it to
higher gas prices, which reduce discretionary spending, and the
growing popularity of e-cigarettes.
"It's hard to tell how long it's going to persist," he said of
the slide. "I think we're going to have to wait and see what
happens with both gas prices...and whether or not the growth rate
of e-vapor slows down."
Mr. Willard confirmed that the company was exploring
opportunities in the cannabis industry. "We acknowledge that it is
currently federally illegal in the U.S., but I think we think it's
worth exploring the category because that might change in the
future," he said.
With these two investments, Altria could buy itself out of a
bind, Cowen analyst Vivien Azer said, noting that it will become
more difficult to use price increases to offset falling cigarette
sales.
Altria has long had an interest in cannabis. An internal
document in 1970 said that the Justice Department had asked the
tobacco company to perform a chemical analysis of marijuana smoke,
and the company viewed the request as an opportunity to explore a
controversial product that was increasingly popular among young
people.
"We are in the business of relaxing people who are tense and
providing a pickup for people who are bored or depressed," the
document said, explaining the decision to grant the DOJ's request.
"The human needs that our product fills will not go away. Thus, the
only real threat to our business is that society will find other
means of satisfying these needs."
Jacquie McNish contributed to this article.
Write to Jennifer Maloney at jennifer.maloney@wsj.com
(END) Dow Jones Newswires
December 05, 2018 02:47 ET (07:47 GMT)
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