Altria looks to a future beyond cigarettes but investors aren’t cheering its $15 billion bet

Juul products are displayed at a smoke shop in New York, Thursday, Dec. 20, 2018.

Seth Wenig | AP
Juul products are displayed at a smoke shop in New York, Thursday, Dec. 20, 2018.

It’s getting harder to be a cigarette company. Altria knows that.

Altria shelled out $14.6 billion to take large stakes in companies outside its traditional hold in cigarettes over the past two weeks — a 45 percent share of cannabis company Cronos and 35 percent stake in e-cigarette maker Juul. The latter, which valued Juul at $38 billion, prohibits Altria from taking a controlling interest for at least six years.

Juul made it clear from the beginning that a full sale was never on the table, a person familiar tells CNBC. The two deals — and terms that Altria was willing to accept — highlight the corner the company is in.

Altria’s core business, selling cigarettes, is shrinking faster than expected. Smokers are dying, quitting or switching to e-cigarettes — and not the ones Altria makes. The company shuttered its MarkTen and Green Smoke brands earlier this month, citing financial performance and tightening regulations.

Juul and Altria courted each other for 14 months, people familiar with the negotiations said. In that time, Altria watched Juul’s sales grow to about $1.5 billion annually.

“We’ve been modeling [Juul’s] financials for quite some time, and modeling their expected growth path,” Altria CEO Howard Willard said Thursday on a call with investors and the media. “And I have to tell you what continually happened was they exceeded our optimistic growth projections.”

Both deals have the potential to transform Altria’s business, or at least give it the kind of growth it’s unlikely to see in its existing cigarette business.

“These investments complement our very strong core tobacco businesses and provide exciting opportunities for future growth,” Willard said.

But it’s hardly won investors over. Altria’s stock hit a 52-week low Thursday after announcing the deal. Shares fell another 3 percent Friday, setting a new floor of $48.75, and bringing the stock down 31 percent this year. It’s market value sits at $91.5 billion.

Trouble in the U.S.

Selling cigarettes has been a shrinking business for decades, but Altria has been able to manage.

Since 2009, Altria’s revenue has grown 9 percent, to $25.58 billion from $23.56 billion. But Altria’s U.S. cigarette volume has nearly halved — to 116.6 billion units in 2017 from 211.9 billion units in 2000.

And Altria currently makes the bulk of its money selling cigarettes. Of the $25.58 billion in total revenue the company generated last year, $22.64 billion — or 89 percent — came from its smokeable products business segment, which contains cigarettes and cigars.

[“source-forbes”]

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