JUUL (copy)

A Juul Labs Inc. e-cigarette, USB charger and flavored pods.

An alliance between the manufacturers of the top-selling traditional and electronic cigarettes may be coming to fruition, according to media reports and analysts.

The Wall Street Journal reported late Thursday that Altria Group Inc., the maker of Marlboro, cigarettes could make a several billion-dollar investment in Juul Labs Inc., the maker of Juul e-cigarettes.

Juul declined to comment Thursday on the speculation, while Altria said its policy “is to not comment on rumors and speculations.”

Bonnie Herzog, an analyst with Wells Fargo Securities, said the investment could range between $4 billion and $7 billion, based on Juul’s estimated market capitalization of between $15 billion and $16 billion.

“Finally, it’s all coming together and making sense,” Herzog said. “We’ve longed believed Altria has wanted to, and should, acquire Juul.”

That’s based on Altria’s history of buying tobacco companies in categories that it has struggled to develop on its own.

Juul Labs, based in San Francisco, declared in a July 10 regulatory filing that it had sold $650 million in securities from a $1.25 billion offering that started June 26. There were 10 investors at that time. Juul has not provided an update on the offering.

Juul entered the mainstream retail marketplace in 2015 and has proven that a startup manufacturer can compete with the Big Three manufacturers: Philip Morris USA, R.J. Reynolds Tobacco Co. and ITG Brands LLC.

Juul is sold in the form of a pen or a USB device. That design makes it easy to hide, which Dr. Scott Gottlieb, the head of the U.S. Food and Drug Administration, said has contributed to “an epidemic” of teenage use, albeit based on a small sample size nationally.

The latest Nielsen convenience‑store data, released Tuesday, show Juul with a 76.1 percent U.S. e-cig market share.

Altria subsidiary Nu Mark LLC ranked fourth in market share, at 4.3 percent. Its MarkTen e-vapor products have struggled to gain traction since their introduction.

Philip Morris USA is first in traditional cigarettes, with a 55.1 percent market share. Marlboro accounts for 48.1 percent of that.

“We estimate Juul’s annual revenue at $2 billion,” Herzog said.

“While we assume Altria would pay a fairly rich multiple to acquire its Juul stake, we think this would be the absolute right decision given where we think the reduced risk industry is heading and because Juul is the ‘it’ brand,” she said, with “it” being e-cigarettes.

“We think a stake in Juul would help to round out Altria’s reduced-risk portfolio strategy,” Herzog said. “We think it would help Juul better navigate the regulatory landscape.”

Most of the latest Nielsen tobacco product data was collected before the FDA announced on Nov. 17 its plans to limit e-cig flavors to tobacco, menthol and mint.

It could take the FDA several years, and likely multiple lawsuits, before it could implement all of its regulatory changes involving the flavorings of traditional and electronic cigarettes.

On Nov. 14, Juul said it would start selling only those flavors at more than 90,000 convenience stores and vape shops.

The creme, cucumber, fruit and mango flavors being removed remain available at www.juul.com, but with heightened age-restriction policies and age-21 verification that requires consumers to provide their name, date of birth, permanent address and the last four digits of their Social Security number.

For some stores, however, the removal will be only temporary — the four flavors will return to locations that can meet the planned FDA age-verification policies on purchases.

Any Altria investment would come with some potential significant risk for both companies, similar to British American Tobacco Plc’s exposure in July 2017 when it spent $54.5 billion to buy the 57.8 percent of Reynolds American Inc. that it didn’t already own.

BAT bought all of Reynolds in large part to gain Newport, the top-selling U.S. menthol cigarette, and Vuse, the No. 2 e-cig.

The FDA has proposed a crackdown on traditional menthol cigarettes to the point they could face being banned in the future.

Gregory Conley, the president of American Vaping Association, said, “It’s hard to blame Juul for considering a deal with Altria.

“Its survival in the U.S. will require the sort of sophisticated lobbying and public policy strategy that helped Altria pass the Tobacco Control Act of 2009,” Conley said.

He said that if the FDA approves the iQOS heat-not-burn traditional cigarette, “Altria would be in a good place to recast itself as a technology company and set ambitious goals for reducing their own cigarette sales, as Philip Morris International has done.”

Matt Myers, the president of Campaign for Tobacco-Free Kids, said the potential Altria investment “calls into question Juul’s seriousness when they say their mission is to help adult smokers by eliminating cigarettes.”

Myers said Juul “has followed Big Tobacco’s playbook by engaging in marketing that appeals to kids, denying any responsibility for youth use of its products and hiring high-priced lobbyists to help it fight effective regulation.”

“So why not go all the way and join forces with Big Tobacco.”

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rcraver@wsjournal.com 336-727-7376 @rcraverWSJ

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