Altria Pivots Strategy in Vaping but Pays a Full Price Again

Altria MO has shifted gears in its strategy to operate in the U.S. vaping category with the announcement that it will acquire U.S. vape manufacturer Njoy Holdings for an initial $2.75 billion and will swap its remaining equity interest in Juul Labs for nonexclusive rights to Juul’s heated tobacco intellectual property. We are retaining our $52 fair value estimate, implying 10 times 2023 earnings, based on low-single-digit revenue growth and slowly fading margins. These transactions do not materially affect those forecasts, and Altria itself did not change its guidance for this year, but we view the acquisition positively from a strategic point of view because it keeps Altria’s real options alive as the industry shifts from cigarettes to substitute categories.

According to PitchBook, Njoy generated $14 million in revenue in 2021, valuing the deal, even excluding contingency payments, at almost 200 times 2021 revenue. However, the approval of Njoy Ace for marketing in the United States last year—it’s the only pod-based product currently on the market, though British American Tobacco has applications pending for Vuse Alto—means that 2022 and forward revenue is likely to be many multiples of the 2021 level, and the valuation multiple of the transaction much lower. Ace represented 85% of Njoy’s shipments in 2022. On that basis, revenue could have been as high as $100 million last year, which would put the transaction valuation at a still very high 27 times sales. However, Altria has the ability to significantly expand distribution of Ace, which is currently subscale with only 33,000 distribution points versus Vuse’s 121,000 distribution points and Altria’s 200,000. In addition, Altria’s preferred vendor status in the convenience store channel should help improve in-store placement and drive market share. We expect distribution to ramp up quickly when Ace is added to Altria’s platform, but we think the price paid assumes perfect execution on that growth opportunity.