Marlboro Owner's Antitrust Case Adds to the Burn

Altria's (MO) investment in e-cigarette brand Juul Labs was already looking like a case study in how not to do a deal. Now, an antitrust challenge makes it even harder for the company to stub out the controversy.

The Federal Trade Commission said late Wednesday that it is suing Altria (MO) to unwind the 35% stake it took in Juul 15 months ago. The commission says that the U.S. maker of Marlboro cigarettes agreed not to compete in the vaping category in exchange for a minority interest in its rival, thereby reducing competition in the e-cigarette market. The news sent Altria's (MO) shares down 4% on Thursday, even as the wider market rose.

The case won't go to trial until January next year. In the worst-case scenario, Altria (MO) could be forced to sell a position that has already plummeted in value from $12.8 billion to $4.2 billion after two write-downs. Less severe remedies might include Altria (MO) giving up its right to nominate members to Juul's board or a firewall to protect commercially sensitive information. The deal terms do already say that if competition approval isn't granted, Altria's (MO) 35% interest would be nonvoting shares.

Altria (MO) is likely to argue that the decision to discontinue its MarkTen vaping brands, announced two weeks before the Juul deal, was unrelated to the investment. But the six-year noncompete clause between the two companies that was disclosed at the same time as the deal is harder to reason away. The replacement of Juul's Chief Executive Kevin Burns with Altria (MO) veteran K.C. Crosthwaite last September might also be raked over. Minority investors shouldn't be able to influence the competitive or strategic decisions of a rival under FTC rules.

The tobacco company might have hoped that a minority stake wouldn't face the same hurdles as a full takeover. Although the FTC did warn back in 2016 that such transactions would be scrutinized if they reduced competition in the market, it has raised antitrust concerns over partial interests in relatively few cases.

The prospect of a court case gives investors another reason to sideline Altria (MO), even though tobacco stocks are cheap and sales will likely be resilient during the Covid-19 pandemic. For the four weeks ending March 22, U.S. cigarette volumes increased by 1.8% year over year, according to MSAi data cited by Jefferies analysts. That compares with a 5.3% decline in the same period of last year.

While Altria (MO) shares now trade on just eight times projected earnings, the current management team's recent record means investors are safer getting their nicotine hit elsewhere.

Write to Carol Ryan at carol.ryan@wsj.com


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  04-03-20 0557ET
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