Altria Ends Merger Talks, Makes Changes in JUUL & 2019 View

Altria Group, Inc. MO undertook certain decisive moves on Wednesday. The company ended talks of a potential merger with Philip Morris International, Inc. PM as the companies were unable to come to terms. Altria also issued a verdict regarding CEO transition for JUUL Labs Inc. Further, the company raised the lower end of its earnings guidance for 2019.

It now expects adjusted earnings in the range of $4.19- $4.27 compared with the previous view of $4.15-$4.27. However, this did not have any impact on Altria’s stock price. It seems that investors are cautious regarding the rising scrutiny on vaping products, which is adversely affecting JUUL. That said, let’s take a closer look at the latest moves of the company.

Hopes of Merger Extinguished  

The union of Altria and Philip Morris would likely have created a massive enterprise with strong footing in the tobacco space. Moreover, the companies would have gained from their shared goals pertaining to reduced risk products (RRPs) along with cost and incremental revenue synergies. However, such possibilities have been erased as the companies were unable to reach an agreement.

In fact, investors didn’t seem to welcome this move from the very beginning. Evidently, Altria’s shares have declined nearly 8% since 27 Aug 2019, when the companies had unveiled intentions to unite. Industry experts opine that the call-off of this deal seems logical, given the unfavorable regulatory environment for cigarettes and RRPs.

Nevertheless, Altria will maintain its agreement with Philip Morris pertaining to the commercialization of IQOS in the United States. Markedly, IQOS has received pre-market authorization from the FDA. We note that IQOS has been faring well internationally. Altria, with a Zacks Rank #3 (Hold), is likely to gain from the sale of IQOS in the United States.

JUUL’s CEO Change, Marketing to Wind Down

K.C. Crosthwaite has been appointed as the new CEO of JUUL Labs Inc., in which Altria holds 35% stake. Crosthwaite was previously the chief strategy and growth officer at Altria. The move is likely to help JUUL in meeting the regulatory requirements of the vaping industry efficiently. Further, sources have revealed that JUUL will be withdrawing all modes of advertisements of its products and refrain from lobbying into the government’s actions to regulate e-cigarettes usage.

JUUL has long been under FDA’s vigilance, considering the agency’s negative stance on vaping products and its popularity among teenagers. Concerns surrounding such products have increased recently due to rising cases of vaping-induced lung diseases and deaths. In fact, the government is considering to remove flavored vaping products from the market.

Per market sources, the controversy surrounding JUUL might have triggered Philip Morris to abandon the possible merger with Altria. Also, mounting regulatory pressures on JUUL might have led Altria to tighten the leadership reigns on JUUL.

We note that Altria had been viewing e-cigarettes such as JUUL as a hedge against deteriorating cigarette sales volumes. But hopes of developing a smokeless future on the back of RRPs have dimmed, thanks to regulatory vigilance on e-cigarettes. Persistent cynical views on tobacco and related products have weighed on the stock, which declined 13.7% in the past three months compared with the industry’s fall of 6.3%.

With RRPs now walking a tight rope, it is to be seen how Altria and other tobacco companies with similar products adopt measures to minimize vaping among teenagers.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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