Altria’s decision to terminate its non-compete agreement with Juul Labs opens the big tobacco company up to other opportunities in a burgeoning space, according to experts.
“We believe the decision to terminate our non-compete maximizes our flexibility to compete in the e-vapor space while maintaining our economic interest in JUUL,” an Altria ($MO) spokesperson wrote in an email.
The decision came just over two months after Altria wrote down the value of its stake in Juul to $450 million. It had initially acquired 35 percent of the vapemaker in 2018 for $12.8 billion. At the time, Altria reiterated its confidence in the Juul investment, saying in a statement, “we continue to believe that these investment rights are beneficial to us.”
Given the decrease in the value of Altria’s investment, the owner of the Marlboro cigarette brand had the option at the time to exit its non-competition agreement with Juul, but chose not to. Upon terminating the agreement, Altria loses its right to designate Juul’s board, aside from one independent director and sees its voting power greatly diminished. But, as Jefferies analysts pointed out in a note, the decision opens up Altria to developing its own or acquiring another vape brand.
“Today's update is encouraging therefore, as one, it shows that MO is not willing to let the status-quo persist and two, it allows MO to develop and/or acquire a fully owned vape business in the biggest [reduced-risk products] category in the US, while it would also allow for more expansive international [reduced-risk products] offerings,” they wrote.
Cowen analysts recommended in a note that Altria pursue an acquisition in the space.
“Given MO's limited success in developing products organically, and the time necessary to create a product and file a [premarket tobacco product application], we think it's more likely that MO will seek to buy its way back in to the e-cig category (which represents 7% of U.S. nicotine sales),” Cowen analysts stated.
Altria’s $12.8 billion investment in Juul was an expensive bet that the vapemaker’s e-cigarettes would prove a lucrative alternative to combustible products like cigarettes during a multigenerational decline in the popularity of smoking. At the time, Juul was already under intense scrutiny for marketing practices that ignited an explosive surge in teen vaping and nicotine addiction. Two days before the deal closed, the U.S. Surgeon General Dr. Jerome Adams declared teen vaping “an epidemic” and warned parents specifically about Juul and its “USB flash drive shaped e-cigarettes.”
Since then, Juul’s value has slid in response to a number of regulatory hits, public relations fiascos, and lawsuits. In September, Juul agreed to pay $438.5 million in a settlement with 33 states over marketing practices that have been linked to a surge in teen vaping, but admitted no wrongdoing.
Earlier in 2022, the Food and Drug Administration ordered Juul products pulled from shelves in the United States. A federal appeals court temporarily blocked the ban, and the FDA subsequently reopened Juul’s application. Its products have been permitted to remain on the market until further notice.
Even as the popularity of Juul has tumbled, vaping is on the rise. Rates of vaping leveled off in 2020 during the COVID-19 pandemic but have begun rebounding among 19- to 30-year-olds in 2021, according to the annual Monitoring the Future study from the University of Michigan and the National Institutes on Drug Abuse (NIDA). It showed that 16.1 percent of young adults aged 19 to 30 reported vaping in the past 30 days before taking the survey, and 21.8 percent reported vaping in the previous 12 months.
The global vape market was valued at $18.1 billion in 2021 and is expected to continue to expand at a compound annual growth rate of 30 percent from 2022 to 2030, according to Grand View Research. That likely means greater opportunity for investment for companies like Altria. In 2018, Juul commanded almost 76 percent of market share in the e-cigarette space, but that share has since slid to 34.4 percent, according to the Winston-Salem Journal. Whereas, Vuse, owned by R.J. Reynolds Vapor, recently overtook the top spot, with 34.8 percent of the market.
Representatives for Juul Labs did not respond to Cheddar News’ request for comment.