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A woman smokes a Juul e-cigarette in New York on Sept. 27, 2018.

Brendan McDermid/Reuters

Marlboro cigarette maker Altria Group Inc will buy a 35 per cent 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, announced on Thursday, 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 noncombustible products over cigarettes,” Altria Chief Executive Howard Willard said in a statement.

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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 teenagers.

“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 per cent of the market in early 2017 to more than 75 per cent this month, according to a Wells Fargo analysis of Nielsen retail data. In its release Thursday, Altria said Juul represented approximately 30 per cent of the U.S. e-cigarette space, when factoring in online sales and products in specialty stores such as vape shops.

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The vapour products market, which includes e-cigarettes, is still just a small fraction of the size of the market for cigarettes. Vapour products was a $4.6 billion market in the United States last year, according to data firm Euromonitor International, compared with the nearly $94 billion cigarette market.

Euromonitor projects the U.S. vapour market will nearly triple in size to $11.7 billion by 2022.

E-cigarettes have been a divisive topic in the public health community, offering an alternative to the nicotine in cigarettes without the same toxic and cancer-causing chemicals. But there are concerns around creating new nicotine dependence, as teens are drawn to appealing candy and dessert flavour varieties.

A study released by the National Academy of Sciences this year cited evidence that vaping among young people increases the risk of eventually smoking tobacco.

Federal data released last month showed a 78 per cent year-on-year increase in high school students who reported using e-cigarettes in the last 30 days, coinciding with the rise in Juul’s popularity, which equates to more than 3 million students.

On a conference call with investors Thursday, Altria CEO Willard said he believes underage purchases are a “small contributor” to Juul’s overall sales.

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The U.S. Food and Drug Administration last month announced new curbs on sales of flavoured e-cigarette products, including Juul’s mango and cool cucumber, amid concerns of widespread underage use.

Juul has boosted its own lobbying spending, spending $890,000 so far in 2018, according to the Center for Responsive Politics. That is still far less than Altria’s more than $7 million toward lobbying this year, making it the biggest spender in the U.S. tobacco industry.

MARKETPLACE REPUTATION

One unknown is how the deal could affect Juul’s reputation in the marketplace. In many ways the company positioned itself as the foe of big tobacco, saying in job postings that it was “driving innovation to eliminate cigarettes.”

Juul CEO Burns called Altria a “seemingly counterintuitive” investor but said the company is convinced the deal could “help accelerate our success switching adult smokers.”

Tobacco companies including Altria have been investing in e-cigarettes as U.S. smoking rates decline, but those products have lost significant market share over the last year as Juul’s popularity has surged.

Altria said this month it would discontinue some of its e-cigarette brands, based on their financial performance and will take a related pre-tax charge of $200 million in the fourth quarter.

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Federal data from earlier this month showed 14 per cent of U.S. adults smoked cigarettes, the lowest level ever recorded.

Altria’s cigarette volumes declined by 6.3 per cent in the first nine months of 2018, from a year earlier. The company’s share price has fallen by nearly 30 per cent over the last year.

Some analysts on Thursday expressed concern that Altria was paying too high of a price. A note from Stifel said the deal should help Altria “address the changing consumer attitudes toward nicotine” but that “the price paid offsets most of the future potential benefit” from a Juul investment.

The Juul investment marks one of several bets Altria is making to position itself in a world with fewer cigarette smokers.

It has an agreement with Philip Morris International Inc to sell a heat-not-burn device called IQOS in the United States, where the product is still under review by the FDA. Earlier this month, Altria announced a $1.8 billion investment in Cronos Group Inc, which could give it up to 55 per cent ownership of the Canadian cannabis producer.

Altria on Thursday also announced a cost-cutting program that includes work force reductions and reduced third party spending, to save $500 million to $600 million annually by the end of 2019.

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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.

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This content appears as provided to The Globe by the originating wire service. It has not been edited by Globe staff.

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