Shares of Altria Group (MO) dropped in morning trading after several Wall Street analysts voice the opinion that the price the company is paying for its 35% stake in Juul is a high cost that has the potential, as one put it, to “destroy value.”
BACKGROUND: On Thursday, Altria announced that it would invest $12.8B in Juul, taking a 35% stake in e-vapor company Juul Labs. “We are taking significant action to prepare for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes by investing $12.8 billion in Juul, a world leader in switching adult smokers,” Altria CEO Howard Willard said in a statement. “We have long said that providing adult smokers with superior, satisfying products with the potential to reduce harm is the best way to achieve tobacco harm reduction.” Juul has drawn criticism over its products’ popularity with teens and the U.S. Food and Drug Administration previously announced plans to place restrictions on sales of flavored e-cigarettes. Juul also said it would restrict sales of nearly all its flavored pods to the internet, and stop most social media promotion to combat youth vaping. Altria previously said it would pull its pod-based e-vapor products from the market until approved by FDA. Altria’s investment in Juul comes on the heels of its announcement that it will take a 45% stake in cannabis company Cronos Group (CRON) and discontinue its MarkTen and Green Smoke e-cigarette products and its Verve oral nicotine.
JUUL STAKE ‘DESTROYING VALUE’: Citi analyst Adam Spielman downgraded Altria Group to Sell from Neutral, telling investors in a research note that he believes the Juul stake news is likely “destroying value,” but that it is impossible to be sure as Altria has not revealed any financial details “despite the scale of the investment.” He added that the deal weakens Altria’s existing business, as it allows Juul to directly contact Altria’s current consumers, to try to persuade them to switch from Marlboro to Juul. Meanwhile, Morgan Stanley analyst Pamela Kaufman said Altria’s move comes at a high price, noting that the $38B valuation represents more than double the $16B valuation that JUUL received in an investment round last summer. Additionally, the analyst sees risk in Altria’s lack of operating control and the potential for further FDA regulation. Stifel analyst Christopher Growe called the $38B valuation “unusually high” and, in his view, a negative, as he believes the price offsets most of the future potential benefit, if not all, from the addition of Juul. Moreover, Growe said that at this premium valuation level, he is surprised that the company is not getting control of Juul and cannot get control over the next four years. Deutsche Bank analyst Steve Powers agreed, saying the deal is “not the holiday gift we’d hoped for.”
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