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Sept. 28, 2019, 10:31 a.m. EDT

Philip Morris and Altria merger talks are off as Juul CEO steps down amid vaping fears

Companies will focus on a smokeless tobacco product that is aimed at the U.S. market, sending Philip Morris shares higher

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By Ciara Linnane and Tomi Kilgore, MarketWatch


Reuters
Philip Morris and Altria will focus on their smokeless IQOS product, seen here.

Philip Morris International Inc. and Altria Group Inc. surprised the market on Wednesday with the news that they are ending the merger talks started in late August and will instead focus on launching a smokeless tobacco product in the U.S.

The news sent shares of Philip Morris /zigman2/quotes/201611010/composite PM -0.44%  up 6%, while Altria /zigman2/quotes/208895754/composite MO -0.0082%

“While we believed the creation of a new merged company had the potential to create incremental revenue and cost synergies, we could not reach agreement,” Altria Chief Executive Howard Willard said in a statement. “We look forward to continuing our commercialization of IQOS in the U.S. under our existing arrangement,” he said, referring to the smokeless product that is the linchpin of the companies’ strategy for growth as health officials across the world push to stamp out smoking and end nicotine addiction.

Separately, e-cigarette maker Juul Labs, in which Altria owns a 35% stake, said its Chief Executive Kevin Burns has decided to step down, and will be succeeded effective immediately by K.C. Crosthwaite, who was previously chief strategy and growth officer at Altria. Altria paid $12.8 billion to acquire its Juul stake in December, betting that the e-cigarette and vape market was ripe for expansion.

Juul said it’s suspending all broadcast, print and digital product advertising in the U.S., and will refrain from lobbying the Trump administration on its draft guidance. The announcement comes after a crackdown on e-cigarettes by the U.S. Food and Drug Administration, that has accelerated following a recent outbreak of severe lung disease that appears to be related to vaping. More than 530 Americans have been diagnosed with the illness and at least eight people have died. Juul is now the subject of a criminal probe in California.

See also: As Trump officials plan to ‘clear flavored e-cigarettes from the market,’ Juul signals some support for the move

“I have long believed in a future where adult smokers overwhelmingly choose alternative products like Juul,” Crosthwaite said in a statement. “Unfortunately, today that future is at risk due to unacceptable levels of youth usage and eroding public confidence in our industry.”

Michel Legendre, associate campaign director for Corporate Accountability.Org, said given the health crisis announcements, criminal investigations and class-action lawsuits, it was time Juul ended its marketing in the U.S.

“PMI, Altria and Juul cannot hide behind corporate mergers, glossy ads, and K street any longer,” Legendre wrote in emailed commentary.

Wells Fargo analyst Bonnie Herzog said that while she was dismayed at the breakdown of the merger talks, she was not surprised, given the length of time they were taking and the constant stream of negative headlines from the FDA.

Read now: Vape sales are falling on fears about the outbreak of vaping-related lung illness

“We expect the stocks to trade up sharply (especially PM) since clearly the market wasn’t in favor of this combination, with PM trading up more than MO as concerns about JUUL have weighed on MO and will likely continue to weigh on MO’s multiple,” Herzog wrote in an early note to clients. “However, we continue to think those concerns are overblown and continue to recommend the stock.”

Click to Play

How Juul Took a Page From Big Tobacco's Playbook

Altria, the maker of Marlboro cigarettes, recently invested almost $13 billion in e-cigarette company Juul. Some experts say in its early days Juul mirrored the tobacco industry’s promotional playbook in an effort to hook young people. Photo: Natalia V. Osipova/The Wall Street Journal

What’s more, Herzog expects talks to resume in the future once the environment improves. Philip Morris remains her top stock pick, she wrote.

Philip Morris and Altria had announced talks of a merger of equals in late August that would have reunited them after more than a decade apart. But the market appeared unimpressed with the stocks selling off on the news as analysts questioned the logic of the deal given the regulatory backdrop.

/zigman2/quotes/201611010/composite
US : U.S.: NYSE
$ 83.10
-0.36 -0.44%
Volume: 1.71M
Nov. 22, 2019 1:04p
P/E Ratio
17.33
Dividend Yield
5.62%
Market Cap
$129.85 billion
Rev. per Employee
$382,519
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/zigman2/quotes/208895754/composite
US : U.S.: NYSE
$ 48.82
-0.0040 -0.0082%
Volume: 3.59M
Nov. 22, 2019 1:04p
P/E Ratio
52.10
Dividend Yield
6.88%
Market Cap
$91.20 billion
Rev. per Employee
$2.36M
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