Altria Group (MO 0.76%) recently announced a planned $110 million acquisition of Green Smoke, an e-cigarette company with operations in the U.S. and Israel. The acquisition, set to close in the second quarter, is an indication of Altria's firm commitment to the e-cigarette market.

Altria's Chairman and CEO, Marty Barrington, remarked, "Adding Green Smoke's significant e-vapor expertise and experience, along with its supply chain, product lines, and customer service, will complement Nu Mark's capabilities and enhance its competitive position." 

How Green Smoke fits in with Altria
Barrington is not just paying lip service to Green Smoke when he says Altria could benefit from its expertise. Altria launched its first e-cigarette brand, MarkTen, in August; it was the last major U.S. tobacco company to enter the market. MarkTen launched in Indiana and expanded to Arizona just last quarter. Lorillard (LO.DL), on the other hand, already has a 45% share of the market with its leading Blu e-cigarette brand. Green Smoke -- a veteran in this nascent industry -- has been in the e-cigarette business since 2009. Altria needs Green Smoke's experience as the tobacco giant enters an unfamiliar market.

Moreover, there are signs that consumers are not receiving MarkTen as well as management had hoped. Reynolds American (RAI) recently announced plans for a nationwide roll-out of its Vuse e-cigarette after successful tests in Colorado and Utah, but Altria has been slower to reach that point, deciding instead to continue testing in Indiana and Arizona. Acquiring Green Smoke is in itself a sign that Altria is not content to rely on MarkTen to head up its e-cigarette business. However, in a market with so much promise, Altria's acquisition of a promising brand should help it gain meaningful share in the coming years.

Out of all the small e-cigarette companies that Altria could have acquired, Green Smoke may be the best fit. Green Smoke's e-cigarettes are at the premium end of the category. Altria is the No. 1 tobacco company in the U.S. because of its Marlboro brand -- a premium cigarette with a dominant market share. Even as cigarette volumes decline, Altria increases its earnings per share because of Marlboro's tremendous pricing power, which keeps consumers buying even as the price increases. Entering the market with a premium e-cigarette is a natural extension for Altria's premium traditional cigarettes and may carry similar pricing power.

In addition, Green Smoke has a lot more potential as a part of Altria than it had on its own. Compared to Altria's $17.5 billion in revenue, Green Smoke's $40 million in revenue hardly seems worth talking about. However, Altria's relationships with convenience stores across the U.S., large sales force, and vast distribution network should enable Green Smoke to grow quickly. Given that nearly all of Green Smoke's sales thus far have been made over the Internet, Altria's infrastructure will enable the company to grow market share in a completely new channel.

Finally, the acquisition should enable Altria to gain incremental revenue from Green Smoke's international operations. Under an agreement with Philip Morris International, entered into last December, Altria licensed its e-vapor technology to its international counterpart for distribution outside the United States. Philip Morris International has the infrastructure to distribute Green Smoke worldwide. If Green Smoke's premium e-cigarette technology catches on abroad, it could mean significant royalties for Altria.

Foolish takeaway
It is encouraging to see Altria finally make serious headway in the e-cigarette market. Although the market is still young, it is important for Altria to establish an early lead in the market, lest Blu or other brands gain a permanent advantage in consumer mind-share. Although small relative to the rest of Altria, Green Smoke is an important acquisition that could allow the tobacco giant to gain a significant foothold in a growing market. Investors should be pleased.