Tobacco company Altria Group Inc is in talks to take a minority stake of 20% to 40% in e-cigarette maker Juul Labs Inc, people familiar with the matter said on Wednesday.
The companies declined to comment.
Big tobacco companies, including Marlboro-maker Altria, have been investing in e-cigarettes as US smoking rates decline, but those products have lost significant market share over the last year as Juul's popularity has surged.
The talks have been ongoing over the last few months, and the size of the stake could change, the sources said. The talks could still fall apart because of the many shareholders and regulators involved, one source said.
Grow With Reduced Risk
Such a deal could allow Juul to continue to grow with reduced risk, the people said, without losing control of the company.
Privately held Juul's vaping devices, which resemble a USB flash drive, have helped the company quickly become the market leader in the US e-cigarette business, growing 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.
Juul's sleek design and sweet flavours, including mango and creme, made it particularly popular among high schoolers. "Juuling" has become synonymous with vaping, with young people posting videos and photos of themselves using the product at school or with friends, often under the hashtags #doit4juul or #juullife.
Juul's e-liquid also has a much higher nicotine content than earlier versions of US e-cigarettes. The company says its products are meant only for adults looking to convert from traditional cigarettes.
Curbs On Flavoured Tobacco Products
Earlier this month, the US Food and Drug Administration announced new curbs on sales of flavoured tobacco products, including Juul's mango and cool cucumber, to age-restricted stores and online merchants that use age-verification checks.
But Juul, launched in 2015, was valued at more than $16 billion (€14.1 billion) based on a July 2018 funding round, according to venture capital database PitchBook Data Inc.
Early Juul investors included Tao Capital Partners, headed in part by Nicholas Pritzker, who formerly ran the Hyatt hotel empire. Other investors include Fidelity Investments Inc and Tiger Global Management, according to PitchBook.
Altria has invested in the e-cigarette sector in recent years through its Nu Mark subsidiary, which sells devices such as the MarkTen e-cigarettes in convenience stores and tobacco shops across the country. In 2014 Altria acquired e-cigarette startup GreenSmoke Inc for $110 million (€96.7 million).
Altria's products, however, have lost significant ground to Juul over the last year, as have e-cigarette brands from other major tobacco companies.
The market share of British American Tobacco Plc, which sells Vuse e-cigarettes, fell from 21.4% of US e-cigarette sales in February to 9.6% this month, while Altria's share fell from 11.1% to 4.4% over the same period, according to the Nielsen data.
Pressure From US Regulators
Any potential investment in Juul carries its own set of risks.
San Francisco-based Juul has faced heightened pressure from US regulators as the growing popularity of flavored e-cigarettes among teenagers has sparked fears of a new generation of nicotine addicts.
Federal data released earlier this month showed a 78% increase in high school students who reported using e-cigarettes in the last 30 days, compared with the prior year, coinciding with the rise in Juul's popularity.
Altria's shares have fallen by more than 20% over the year as cigarette smoking continues to decline in the United States. Federal data from earlier this month showed cigarette smoking among US adults reached an estimated 14% in 2017, the lowest level ever.
Altria's shares rose 1% to $55.55 after the bell on Wednesday.
The Wall Street Journal first reported on the negotiations earlier on Wednesday.