Analysis Of Altria's Recent Deal Activity

Last week, we had Altria Group (MO) announce a major investment in JUUL, which makes e-cigarettes. You can read the press release here.

As part of the agreement, Altria will participate in the e-cigarette category only through JUUL. The investment complements Altria’s non-combustible offerings in smokeless and heat-not-burn, upon FDA authorization of IQOS. JUUL has a large market share in e-vapor market in the US, and has global operations.

Earlier this month, Altria announced an investment in cannabis company Cronos.

As a shareholder, I am not overly excited about these moves. There are several risks I am seeing behind this investment.

The first risk is that they are investing in a business at a high valuation. This is a business that has only been around for a few years, and has an exciting product that can offer a lot of growth for the future. t has had some rapid growth, although we do not know if we can easily project it onto the future.  At a high enough price however at a high sales multiple a lot of the future profits are already baked in. We live in an era where we have a lot of cash chasing private equity deals, which increases their valuation. The implied value of Juul is $38 billion, versus $16 billion during the summer, when the company closed a round of funding from venture capitalists.

Altria has had success in the past with other investments and acquisitions, including those of UST, General Foods etc. So I am going to give them the benefit’s of the doubt of course. But it does seem like JUUL is getting Altria’s shelf space, distribution, relationships with retailers and customers, and Altria is seemingly trying to disrupt its own business. Too much deal activity in such a short period of time, at such inflated valuations seem a little concerning. I am hopeful to be wrong on this one.

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Disclaimer: I am not a licensed investment adviser, and I am not providing you with individual investment advice on this site. Please consult with an investment professional before you invest ...

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