E-cigarette crackdown prompts big tobacco shake-up

The regulatory crackdown on e-cigarettes has prompted Philip Morris International to call off talks about a $200bn merger with Altria and sparked a shake-up at vaping company Juul, which sacked its chief executive and suspended US advertising.

Juul Labs, in which Altria took a 35 per cent stake in December 2018 for $12.8bn, announced on Tuesday an abrupt change of leadership and alterations to its marketing and lobbying policies. 

A person familiar with the situation said PMI decided to walk away after it became apparent the US government crackdown on vaping could have a negative impact given Altria’s stake in Juul.

André́ Calantzopoulos, PMI’s chief executive, said the two companies had decided to focus on the US launch of Iqos, PMI’s heated tobacco product, which, the companies noted, had been authorised by the US Food and Drug Administration following a “rigorous science-based review” and was not an e-vapour product.

Speaking to the Financial Times on the sidelines of a tobacco conference in Washington soon after the collapse of the deal was announced, Howard Willard, Altria’s chief executive, said his company was “always evaluating opportunities. These discussions with PMI just reflected that. Ultimately we’ve ceased negotiations and we’ll move on.”

Juul said Kevin Burns had decided to step down as chief executive. KC Crosthwaite, Altria’s chief growth officer, will replace him. The company added it would suspend all its broadcast, print and digital product advertising in the US and refrain from lobbying the Trump administration on its moves to tighten regulation in the wake of an outbreak of vaping-related lung illnesses tied to several deaths. 

The changes at Juul were intended to reassure PMI that Altria was in control of Juul and would have guided the start-up through the regulatory backlash, said a person informed about the negotiations.

PMI had been informed in advance of the moves, and the selection of an executive with greater tobacco industry experience coming from Altria was appreciated, the person added. 

Up until late last week the two sides were determined to go ahead with a deal. Over the weekend, however, the board of PMI determined that the risks outweighed the benefits of a merger, said people close to the companies. 

Both people said that PMI is likely to pursue a deal with Altria at a later stage once the regulatory environment settles.

Mr Willard told the FT that Juul had “taken a number of leadership actions — they’ve done more than any of the other vapour companies — but it’s still not enough”.

A PMI-Altria combination was pitched as a way for the companies to spread their bets on the future of nicotine consumption, uniting the largest brand in the declining US cigarette market with Juul, which has seized a 70 per cent share of US e-cigarette sales, and the nascent Iqos.

But the deal ran into immediate hostility from both companies’ investors. PMI shareholders expressed concern about taking on exposure to the declining, litigation-wracked US cigarette market. Altria shareholders questioned the logic of a deal that would have offered no control premium.

In early trade on Wednesday in New York, shares in PMI jumped 6 per cent, but Altria’s were down more than 1 per cent.

“Obviously the timing of the merger wasn’t right given escalating [negative] regulatory headlines, but we still see the merits of this combination and wouldn’t be surprised if talks resume at some point in the future when the environment is better,” said Wells Fargo strategist Bonnie Herzog.

The collapse of the talks will also negatively impact the independent investment banks advising them, who will be missing out on significant fees. Lazard was the lead adviser to PMI, while Perella Weinberg Partners and Goldman Sachs were the financial advisers of Altria. 

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