Monday, March 6, 2023

Altria's Bungles

We only just finished speculating about the future of the tobacco and nicotine ("nicotine as a service") industry, but now we must discuss the latest moves by Altria. First, here is what we said last month about Altria and the "tobacco basket":

Altria management really bungled M&A over the past five years, by paying so much for Juul that they had no ability or inclination to bid when a really great asset (Swedish Match) got put on the block. They now have basically no reduced risk program, except what they can salvage from the Juul investment. [...]

As long as the cigarette business is doing well (i.e. earning north of $10 billion), it would not seem to make sense to sell Altria at this valuation. But this company is a mess, and it would be nice to see it cleaned up.

One option would be to exit all of the businesses besides smokables and traditional oral tobacco: sell the BUD stake, sell the Juul interest, and shut down "on!". Suppose that you could get $15 billion for that. We sure wouldn't mind getting, say, a $3.76 special dividend (equivalent to a current year's) with the rest to be used for perhaps debt reduction or share repurchases.

The problem with this is that a tobacco company without a reduced risk platform is vulnerable in the current political climate. It seems essential to be able to point to a "future after tobacco" to keep society's current anti-nicotine mood at bay.

If Philip Morris does not want to reunite with Altria, then Altria is probably going to just limp along selling mostly cigarettes. So the key questions will be: will the tobacco earnings keep growing, and is there any chance that they can get control of Juul and turn it into a profitable business. It is still the best and most popular vape thanks to the superior nicotine chemistry. [...]

We come away from this reflection thinking that the equal weighting of PM, MO, and BTI is still the right approach. There is no clear winner from an investment perspective, at least not yet, because of the wide dispersion in valuation. 

Right before the weekend, Altria announced that they sold (really, gave away) their entire 35% stake in Juul Labs, Inc., for which they paid $12.8 billion, in exchange for "a non-exclusive, irrevocable global license to certain of JUUL’s heated tobacco intellectual property". Then today, Altria confirmed a rumored purchase of NJOY Holdings: they are paying $2.75 billion (plus a possible further $500 million) for the company, which has an FDA-authorized pod vape called the NJOY ACE.

These are just very discouraging developments at Altria and some tobacco investors are kidding themselves thinking anything else.

Juul is the best vaping product, hands-down, the same way that Zyn is the best oral nicotine product. Last year, Altria let Philip Morris buy - practically steal - Swedish Match and Zyn without lobbing a bid or even expressing interest that might have raised the cost for its competitor. It would not surprise us if Philip Morris gets a hold of Juul (which still the vape leader with close to 40% market share) and turns it into a cash cow. (What would be really amazing is if PM uses its regulatory connections to get an authorization - MGO - for Juul vapes but only after buying it at a great price.)

But Altria won't make a penny off of a Juul acquisition or turnaround. All they are getting is a non-exclusive IP license for heated tobacco, which implies that they are going to waste more money trying to buy or acquire a heated tobacco product for the U.S. Didn't they learn from the poor performance of IQOS in the United States that heated tobacco does not appeal to U.S. nicotine consumers?

Then they went on to pay $2.75 billion for a vape which, while FDA-authorized, has only one-tenth the market share of Juul. In the release, Altria comments that "NJOY-branded products were not included among the most often used usual brand among middle and high school e-cigarette users in the 2022 NYTS." As though that is a good thing!

Altria gets the worst of negotiations. If they got the better of negotiations, they would not have walked away from Juul without getting cash. Nor would they have paid cash for NJOY. A respectable deal would have been to pay some nominal amount (maybe as low as $0) for 51% of the company with the promise to invest in building the brand and trying to grow market share from sub-3% to something serious.

What we would have liked to see is: get paid big bucks for Juul, pay nothing for NJOY (get a free option), and distribute the balance to shareholders. Even better would have been if Altria had gotten control of Juul. Imagine a "Marlboro" Juul.

Instead, the problem is the same as it was in 2018 when they bought Juul: they are desperate to get out of cigarettes. Perhaps this is rational, as we speculated in our February post. Maybe regulators and society will not tolerate a pure-tobacco company operating in runoff. But if that is the case, we can probably expect a couple billion dollars a year of cash wasted by Altria flailing unsuccessfully to create a reduced-risk product.

And, if that is the case (that they need some kind of reduced risk product in order to be able to enjoy their runoff cigarette profits), then they really should have tried to trade their BUD stake for Swedish Match last year.

We no longer believe in an equal basket of MO, PM, and BTI. Maybe a half-weight for Altria is appropriate, given the low valuation the market puts on Altria's cash flows from tobacco. But we probably need to assume that at least $1 billion of the cigarette cash is going to get eaten up every year on reduced risk bungles. It is almost like an extra tax on their cigarette business.

We wonder whether Altria will end up in a few years being taken-under by Philip Morris at a share exchange ratio that is less favorable than today's?

1 comment:

CP said...

FUCK NJOY. I have had nothing but shit pods lately. Either they leak or taste like hot iron. I fucking hate this company and they idiots working for it. After all the money we spend and they give us pods that don’t even work. I hope this company dies.

Been using NJOY for about 8ish months now and I’ve noticed that sometimes the pods taste more burnt or flavorless depending on the pod. Last week I bought a pack of 2 Classic Tobacco pods and immediately the first one tasted awful and was unusable. Take the second one out and put it in the same device and it’s perfectly normal
Also I’ve noticed half the time I get ones that have some flavor to them and the other half of the time they’re more bland. I buy them because they’re the cheapest reusable pod-type vapes that I know of but I guess you get what you pay for

Same. I’m so fed up with n joy pods that taste burnt or the whole pod leaking out into my device and making a mess. With all the complaints they have been getting over the past 6 months how has something not changed or this problem been corrected. I want to switch devices but I don’t know what to switch to. I want a device that sells filled pods at convenience stores. I don’t want to deal with changing coils or filling pods with juice. Any suggestions?