Marlboro cigarette maker Altria Group Inc will buy a 35 percent stake in Juul Labs Inc for United States dollars 12.8 billion, a marriage between an old-line tobacco giant and a fast-growing electronic-cigarette rival looking to make inroads among smokers.
The statement argues that Altria's distribution network and retail reach will help expand Juul's reach, thereby decreasing the rate of combustible cigarette sales by encouraging smokers to migrate to e-cigarettes, citing industry-funded research finding e-cigarettes cause smokers to switch, resulting in declining cigarette use.
The $12.8 billion deal gives Altria 35 percent of Juul's shares.
While it probably won't solve the problem entirely, Altria's $2 billion bonus could help smooth over objections from Juul employees about being bought out (even as a minority investor) by Big Tobacco, with some workers saying that Juul is making a "deal with the devil".
Altria and Juul did not immediately respond to requests for comment.
He said the company ultimately was convinced the deal could "help accelerate our success switching adult smokers".
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The move allows Altria, which is the parent company of Philip Morris, to hedge its bets on the future of nicotine, as cigarette smoking declines in the U.S.
Despite being safer than traditional cigarettes, Juul, founded in 2015 and headquartered in San Francisco, nevertheless has found itself at the centre of controversy over the appeal of its products to young people. However, despite these risks, approximately two-thirds of JUUL users aged 15-24 do not know that JUUL always contains nicotine. In its release Thursday, Altria said Juul represented approximately 30 percent of the U.S. e-cigarette space, when factoring in online sales and products in specialty stores such as vape shops.
Sources told CNBC that Altria would add Juul coupons to Marlboro and other cigarette packs, the deal terms suggested. The F.D.A. has said it intends to create new regulations requiring traditional cigarette makers to reduce the amount of nicotine in their products.
Altria said this month it would discontinue some of its e-cigarette brands, based on their financial performance and will take a related pre-tax charge of Dollars 200 million in the fourth quarter. It comes on the heels of its investment in Canadian cannabis company Cronos Group Inc. earlier this month.
The culmination of a yearlong negotiation, the investment in Juul will see Juul pods sold alongside Marlboro and give Altria control over one-third of Juul's board of directors.
Altria also announced cost cuts of about US$500 million to US$600 million a year by the end of 2019.