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Talk about a deal that went up in smoke!

As you may have heard, tobacco giant Altria Group ($MO) published its latest earnings release on Jan. 30, and disclosed a $4.1 billion impairment charge for its investment in e-cigarette maker Juul.

This was actually the second big impairment charge Altria has taken over its Juul misadventures. In its Q3 filing from November, Altria coughed up a $4.5 billion impairment as lawsuits, regulatory scrutiny, and bad headlines began to swirl. Since then the news has gotten nothing but worse for Juul, which meant nothing but more impairments for Altria.

So we fired up the Calcbench databases and decided to take a look.

Consider the history year. In December 2018, Altria announced a $12.8 billion investment in Juul for 35 percent of the company. That deal implied a total valuation for Juul (which is not publicly traded) of $37 billion.

Altria financed the investment by short-term borrowing the whole sum, due in December 2019, at 3.5 percent interest. Ouch, but more on that momentarily.

Anyway, that investment might have seemed plausible 14 months ago when it happened. Alas, 2019 was not kind to Juul. Public health officials pieced together the threat of vaping disease, which has killed at least several dozen people across the country and left many more with serious lung problems. Regulators began cracking down on e-cigarettes; Juul, as the biggest player in the business, bore the brunt of that opprobrium.

Things began to unravel in October. Hedge fund Darsana Capital Partners wrote down its investment in Juul by one-third, and cut its estimated value of Juul down to $24 billion. That makes sense; $24 billion is a one-third reduction from $36 billion.

Altria followed suit with its first impairment charge, that $4.5 billion hit that the company disclosed in Q3. As the company diplomatically phrased things:

While there was no single determinative event or factor, Altria considered impairment indicators in totality, including: increased likelihood of U.S. Food & Drug Administration (FDA) action to remove flavored e-vapor products from the market pending a market authorization decision, various e-vapor bans put in place by certain cities and states in the U.S. and in certain international markets, and other factors.

The latest impairment, $4.1 billion in Q4, is apparently due to the spike in lawsuits against Juul. As Altria noted in its earnings release, since Oct. 31, 2019, the number of lawsuits pending against Juul has spiked by more than 80 percent. Ugh.

Those impairment charges have added up for Altria. The company reported $10.3 billion in operating income, but by the time it was done with interest on debt and all those impairments — including another $1.4 billion loss on financial instruments extended to cannabis company Cronos Inc. ($CRON), which we won’t even get into today — Altria was staring at a $1.29 billion net loss for 2019.

Beyond the Impairments

First, about that $12.8 billion in short-term debt Altria borrowed to pay for its Juul stake, originally due in December 2019. If you use our Interactive Disclosures page to research things, you find an interesting tale.

Three months after the investment deal, Altria paid off the short-term debt by issuing long-term notes of $11.5 billion and €4.25 billion. The debt is due in various amounts from 2022 to 2059, with interest rates anywhere from 1 to 6.2 percent.

So that giant asteroid of debt did not collide with Altria in Q4 after all, but the company will be paying off its misadventures with Juul for decades to come.

Also, part of the original investment was that Altria would provide various commercial services to Juul through 2024: logistics, distribution, youth vaping education, regulatory affairs, and so forth. And Altria signed a non-compete agreement with Juul that Altria would only dabble in e-cigarettes through Juul. And a clause that allowed Juul to license various bits of Altria intellectual property royalty free.

Like, a generous deal. Juul had been riding high through 2018, and by the end of that year, Altria was ready to pay quite a bit for a piece of that action.

Well, here we are two impairments later, lawsuits everywhere, and this line included in the earnings release from Jan. 30: “Altria will discontinue all other services by the end of March 2020 that were part of the original investment agreement.”

That’s one way to get burned.


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