Juul Labs: Minority Stake Write-Down

The winner of the M&A Bad Timing Award – Altria – has written down its investment in Juul Labs. Again. The consumer products giant wrote down its investment in Juul – the controversial e-vaping company – by $4.1bn. An earlier write down had been taken for $4.5bn in October 2019. It was only in December 2018 that Altria acquired 35% of the common stock of Juul for $13bn.

Now Juul faces lawsuits both from users and from governmental authorities that could cost untold billions. Already, the toll is showing up in the company’s results : “The Richmond, Virginia, company on Thursday reported that it had swung to a loss in the fourth quarter from the associated costs, citing burgeoning legal cases that it expects to grow“.

We’ve hesitated till now to add Juul Labs to the BDC credit Reporter’s Under Performers list given that the new 2023 Term debt in which two BDCs have exposure was trading at close to par on September 30, 2019 and remains valued at only a (2%) discount to par at time of this writing. Nonetheless, we’ve decided to add the company, with a Corporate Credit Rating of 3 (Watch List) based on the possibility of a potentially huge but currently unknowable amount having to be paid out as compensation for the many vaping deaths and other damage. Not to mention the legal costs and reputational impact to the company, which may yet prove fatal. The Altria write-down was a timely trigger for our own downgrade.

Two-thirds of the $52mn of BDC debt exposure is held by BlackRock TCP (TCPC) and the other third by sister firm Blackrock Capital (BKCC). That’s $4.8mn of annual income at risk. We don’t expect there will be any immediate threat to Juul’s debt, but down the road there’s a reasonable risk of serious trouble, as we’ve seen with other companies whose products have suddenly become controversial. Think Mallinckrodt and opioids.