As Altria's (MO 0.14%) $12.8 billion investment in electronic cigarette maker Juul Labs last December wends its way through the regulatory approval process, the tobacco giant is preparing for the next phase of its investment. It announced that it is seeking to convert its nonvoting shares into voting shares and gain the right to appoint one-third of the directors who sit on Juul's board.
The Federal Trade Commission (FTC) has made a second request for information about the transaction, a not-uncommon development in a big acquisition. But with the e-cig maker coming under greater scrutiny by the U.S. Food and Drug Administration (FDA) because of the device's popularity among teenagers, the transaction's risk grows.
An adult using a Juul device, like this one, is not the chief concern of the FDA. Image source: Juul Labs.
A co-dependent relationship
In at least one key way, Altria's investment in Juul Labs should have allayed regulator worries. While many observers were shocked by the deal, particularly because Juul had regularly trumpeted its independence and that it was not Big Tobacco, it was actually a smart move because both companies need each other.
Cigarette smoking has been declining for decades, and the speed of the falloff has accelerated with the proliferation of electronic cigarettes. Altria's own foray into e-cigs was largely a failure, particularly after the rise of Juul, and the cigarette maker pulled its own e-cig brands off the market until regulators came up with rules regarding teen use.
For its part, the FDA has been vocal about what it calls the "epidemic" of teen access to the devices. Its attention has come down particularly hard on Juul, which has a market share of around 75% and is reportedly the most popular e-cig used by teenagers.
That's why Juul welcomed Altria's investment. The tobacco giant has extensive regulatory experience and a measurable track record of preventing adolescent access to cigarettes. As a significant stakeholder in Juul Labs, Altria could use that experience to keep e-cig devices from being sold to teens.
Yet many regulators didn't view it that way. The outgoing FDA commissioner, Scott Gottlieb, said that the investment would undermine both companies' commitment to limit teen access to the devices. And after demanding a face-to-face meeting with executives for them to explain their decision, Gottlieb expressed disappointment that the deal was made for business reasons, not public health concerns.
Now the FTC is requesting more information about the transaction. While not unusual, it extends the waiting time for antitrust approval by 30 days from when Altria complies with the request.
Hitting the ground running
As part of the original investment, Altria paid almost $13 billion for a 35% nonvoting stake in Juul, or a 33.2% position on a fully diluted basis, and was also able to immediately appoint one director to the board.
Upon regulatory approval, Altria's nonvoting shares will automatically convert into voting shares and give the tobacco company the right to appoint a third of Juul's directors. Among other provisions, Altria would also be able to sell its shares on the market if Juul has an initial public offering. Altria is apparently expecting approval because it notified the FTC of the pending conversion of the stock.
Under the Hart-Scott-Rodino antitrust act, companies exchanging nonvoting shares for voting shares in an acquired company are required to tell the FTC about it. Just last year, the regulatory agency wrote a blog post reminding companies they were required to inform the FTC of such conversions, and highlighted a 2014 case where Berkshire Hathaway acquired nonvoting shares in USG, but failed to tell the agency when it converted those shares over to voting rights. Berkshire Hathaway ended up paying an $896 million fine.
In a statement announcing the second request for information and that Altria was moving ahead with notifications for its conversion, the tobacco company said: "Altria continues to believe that its investment and the services Altria has agreed to provide JUUL will promote competition and have long-term benefits for adult smokers. Altria continues to anticipate that the conversion of its JUUL shares will occur as planned."
Ready for action
This move is nothing new, and is in fact required by regulation. But when completed, Altria will have much greater control over the direction Juul takes. While that has worried some -- 11 Democratic senators have launched an investigation into Juul and its acceptance of Altria's investment -- it doesn't change the fact that Juul should end up in a much better position to meet regulatory requirements because it will have Altria as a partner to help it meet the government's expectations.
