Marlboro cigarette maker Altria Group Inc has confirmed that it is to buy a 35% stake in Juul Labs Inc for $12.8 billion, a marriage between an old-line tobacco giant and a fast-growing electronic-cigarette rival looking to make inroads among smokers.
The deal values San Francisco-based Juul at $38 billion, more than double the roughly $16 billion valuation it achieved in a July private funding round, highlighting what Altria sees as a growth path in the face of declining cigarette sales.
"We are taking significant action to prepare for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes," Altria Chief Executive Howard Willard said in a statement.
The connection to Altria is expected to get Juul, which has risen swiftly over the last three years to become the U.S. market leader in e-cigarettes, more prominent distribution in convenience stores and other traditional retail channels, as well as such promotion as advertisements in traditional packs of cigarettes.
Altria brings decades of lobbying expertise in Washington that could benefit Juul as the company navigates heightened federal scrutiny of its products' popularity among younger consumers.
"Our success ultimately depends on our ability to get our product in the hands of adult smokers and out of the hands of youth," Juul Chief Executive Kevin Burns said in a statement Thursday, adding that Altria's expertise will aid in those efforts.
Tying up with a tobacco company, however, carries reputational risks for the e-cigarette startup, which has formed a company culture around "disrupting one of the world's largest and oldest industries," according to its recruiting materials.
Under terms of the deal, Altria may not buy additional Juul shares or mount a takeover attempt for four years. Nor can Altria sell or transfer any Juul shares for six years or participate in the e-vapor category except through Juul for that period.
The deal, which is subject to antitrust clearance, would give Altria the right to nominate directors representing a third of Juul's board, the cigarette giant said.
Juul's devices, which vaporize a nicotine-laced liquid and resemble a USB flash drive, have grown from 13.6% of the market in early 2017 to more than 75% this month, according to a Wells Fargo analysis of Nielsen retail data.
Altria on Thursday also announced a cost-cutting program that includes workforce reductions and reduced third party spending, to save $500 million to $600 million annually by the end of 2019.
The company expects pre-tax charges of about $230 million to $280 million, or nine to 11 cents per share, the majority of which will be incurred in the fourth quarter of 2018.