U.S. tobacco giant Altria, maker of major brands such as Marlboro and Chesterfield, announced Thursday that it will buy a 35 per cent stake in popular e-cigarette maker Juul for US$12.8 billion.
The deal comes as U.S. regulators increase scrutiny of usage among young consumers of the fast-growing vaping products that tobacco companies hope will compensate for declines in conventional cigarette sales.
The investment more than doubles the value of Juul to $38 billion.
"We are taking significant action to prepare for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes," Altria CEO Howard Willard said in a statement.
"Through Juul, we are making the biggest investment in our history toward that goal."
He said the products can help "achieve tobacco harm reduction."
E-cigarettes expose smokers to significantly lower levels of potentially toxic substances, except for nicotine, the U.S. National Academies of Sciences, Engineering and Medicine said this year.
Converting conventional cigarette users to vaping would therefore reduce the number of cancer cases.
Juul CEO Kevin Burns described the Altria investment as "unlikely" and said he was "skeptical" that a conventional tobacco company could align with its objectives.
"But over the course of the last several months we were convinced by actions, not words, that in fact this partnership could help accelerate our success switching adult smokers," Burns said in a statement.
The agreement lays out requirements for Altria to make Juul products available at retail stores, and limits Altria's ownership stake to 35 per cent, enabling Juul to maintain control, Burns added.
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.
Numerous parents and high schools complain about the growing use of Juul by teenagers, raising fears that a new generation is being exposed to nicotine, which is addictive but not cancerous.
The U.S. Food and Drug Administration has denounced "an epidemic of regular nicotine use among teens." The agency in November proposed a series of new regulations, including barring online sales of flavored e-cigarettes products, only allowing them to be sold in stores.
No one under 18 can purchase smoking products in the United States, although some states have set the minimum age at 21. Juul's website requires users to assert they are at least 21 years old, with strict age verification steps.
In recent months, Juul has suspended in-store sales of certain flavored offerings and scrapped its social media presence. It has made available its selection of Mango, Creme and other flavors online.
Willard said he favored setting 21 as the minimum age nationally for purchasing the products.
While the impact of youth purchases on Juul's sales has been "quite small," the industry still must take action, he said in a conference call with analysts.
Youth consumption of e-cigarettes "is a big problem that needs to be resolved and if it's not resolved, it's going to put the whole category at risk, including for adults," he said.
The FDA's actions could create "some disruption" to e-cigarette demand in the short-term, but he said he is confident of long-term growth prospects.
Altria has taken a $14.6 billion loan facility to finance the Juul deal and a $1.8 billion acquisition of a 45 per cent stake in Canadian cannabis company Cronos Group announced earlier this month.
The tobacco giant, which had revenues of $25.6 billion in 2017, plans $500 to $600 million in annual cost savings through job cuts and other measures.
S&P Global Ratings downgraded Altria's credit grade, saying the investments in Juul and Cronos were unlikely to have payoff in the next couple of years.
"While we generally view Altria's investments in Juul and Cronos as good strategic decisions to hedge against secular declines in combustible cigarette volumes, we believe recent statements by the FDA in response to increased youth usage of e-cigarettes makes Juul's long-term value a relative unknown," S&P said.
Shares of Altria ended at $50.44, down 1.9 per cent amid a broader market decline.
