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Marlboro owner Altria buys one third of vape company Juul

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Marlboro cigarette maker Altria Group Inc on Thursday announced it would pay $12.8 billion to take a 35 per cent stake in Juul Labs Inc, a marriage between an old-line tobacco giant and a fast-growing electronic-cigarette rival looking to make inroads among smokers.

The deal values San Francisco-based Juul at $38 billion, more than double the roughly $16 billion valuation it fetched in a July private funding round, highlighting what Altria sees as its next phase of growth in the face of declining smoking rates and cigarette sales in the United States.

“We are taking significant action to prepare for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes,” Altria COE Howard Willard said in a statement.

For Juul, which has risen swiftly over the last three years to become the U.S. market leader in e-cigarettes, the Altria investment is expected to give it more prominent distribution in convenience stores and other traditional retail channels.

The companies said Juul will be able to reach Altria’s customers through advertisements in traditional packs of cigarettes as well as direct mailers to customers.

Altria also brings years of lobbying expertise in Washington that could benefit Juul as the company navigates heightened federal scrutiny over 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 “this investment and service agreement helps us do just that.”

Under terms of the deal, Altria is subject to a standstill agreement under which it may not buy additional Juul shares above its current interest. Altria has also agreed not to sell or transfer any Juul shares for six years from the closing of the deal.

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.

Only about 14 per cent of American adults still smoke, but vaping is more common among young people, such as this woman shown holding a Juul vape device while looking at her iPhone. (Gabby Jones/Bloomberg)

The company also said that it would participate in the e-vapor category only through Juul for at least six years.

Juul’s devices, which vaporize a nicotine-laced liquid and resemble a USB flash drive, grew from 13.6 percent of the market in early 2017 to more than 75 percent this month, according to a Wells Fargo analysis of Nielsen retail data. In its release Thursday, Altria said Juul represented approximately 30 percent of the U.S. e-cigarette space, when factoring in online sales and products in specialty stores such as vape shops.

Federal data released last month showed a 78 percent 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.

The U.S. Food and Drug Administration last month announced new curbs on sales of flavored e-cigarette products, including Juul’s mango and cool cucumber, amid fears that the products could lead a new generation into nicotine addiction.

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.

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 “disrupting one of the world’s largest and oldest industries” and “driving innovation to eliminate cigarettes.”

Juul CEO Burns acknowledged that in announcing the deal, calling Altria a “seemingly counterintuitive” investor.

“We understand the controversy and skepticism that comes with an affiliation and partnership with the largest tobacco company in the U.S. We were skeptical as well,” he said, adding that the company ultimately was 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.

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 for the 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.

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

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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Real Estate

CMHC: Toronto and Vancouver Real Estate Delinquencies Rise, While The Rest of Canada Falls

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Canadian real estate markets are seeing mortgage delinquencies fall… just not in Toronto or Vancouver. Equifax data crunched by the CMHC shows the national rate of delinquencies fell in Q1 2020. Breaking down the numbers, this trend is stronger in some real estate markets than others. Montreal for instance, is seeing their delinquency rates drop to multi-year lows. Toronto and Vancouver are on the flip side of the stat, and are actually seeing delinquencies rise.

Mortgage Delinquency Rates

The mortgage delinquency rate is the percent of mortgages overdue. Today’s Equifax numbers are mortgages that are more than 90 days overdue. Pretty straight-forward, but there’s two things to keep in mind – seasonality and level.

Mortgage delinquency rates, like other forms of credit delinquencies, tend to be seasonal. When looking at seasonally sensitive numbers, quarterly changes don’t tell us a lot. Unless there’s a sudden and abrupt change that’s not seasonally observed. Instead, it’s the year-over-year change of the quarter that’s more important.

The next note to keep in mind is there’s no universally high or low level for delinquencies. Some regions like Montreal, have always had higher levels of delinquencies. Cities like Toronto and Vancouver are always lower than the national level. With regional variances like this, it’s more important to focus on the velocity of change. If Vancouver had the same level of delinquencies as Montreal, but with Vancouver supersized mortgages – it would be catastrophic for the economy. It only needs to be up a few points for real estate markets to be in trouble, before it becomes an emergency.

Canadian Mortgage Delinquencies Fall

Canadian mortgage delinquencies were falling across the country in the first-quarter. The rate of mortgage delinquencies fell to 0.29% in Q1 2020, unchanged from the previous quarter. Compared to the same quarter last year, this was 3.3% lower. Since delinquencies are seasonal, the quarter over quarter change is less significant than the annual change. In this case, the delinquency rate was improving on the national level.

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Bank of Canada Pumping Billions Into Mortgage Liquidity To Prop Up Real Estate

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Canada’s central bank is desperately trying to prop up real estate markets with liquidity. Bank of Canada (BoC) has been injecting billions into Canada Mortgage Bonds (CMBs). The central bank began purchasing a few million worth of bonds during last year’s real estate slow down. As the pandemic hit, the BoC began buying hundreds of millions worth of CMBs per week. The flood of liquidity has a limited impact on preserving prices, but creates a massive withdrawal risk.

Canada Mortgage Bonds (CMBs)

Canada mortgage bonds (CMBs) are debt securities guaranteed by the Government of Canada. Basically, lenders originate mortgages, and then group them into a pool. The pool is then sold to the government as a mortgage backed security (MBS). In order to buy MBSs, the government sells CMBs to investors to generate the funds. The cash flow from the MBS is then used to make payments to investors holding CMBs. Long story short, the CMBs are a state secured vehicle for mortgage financing.

Since the government of Canada guarantees all CMBs, they pay very little interest. In a normal market, when demand rises for CMBs, interest paid falls even further. When demand drops, interest rates typically rise to attract more investment. Simple supply and demand, right? Not in a country that’s gone all-in on its housing bubble.

When real estate markets began looking a little tired last year, the BoC stepped in. They started buying CMBs to “improve liquidity,” which is bankster for suppressing rates. At first, they said it was going to be on a non-competitive basis – meaning they would support market rates and prevent increases. Starting on March 20 of this year though, they announced they would start buying on a competitive basis. They now actively play a role in driving mortgage rates down. This drives investors even further away from the asset class, meaning they have to buy even more. In other words, money printer goes brrr.

The BoC Is Injecting Hundreds of Millions Per Week

The BoC has purchased billions in CMBs since the beginning of the year. As of July 22, the BoC held $7.95 billion in CMBs, up $234 million from a week before. That works out to a balance increase of 1,450% from the same week last year. What started as just a few million worth of bonds, has turned into a few million per week.

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‘Hobbit house’ hits Alberta real estate market for the first time

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Thanks to a creative Calgary family who had a vision for their vacation home, J.R.R. Tolkien fans don’t need to journey to Middle-earth to visit the Shire.

They only need to know where to look in the Alberta foothills.

An earthen home built into the hillside near Millarville, Alta., by Calgarians Rodney and Ouida Touche in 1971 is on the market for the first time since its construction.

It was designed by Bill Milne, the architect behind the Calgary Tower and the city’s pathway system.

And if you ask many of the Millarville locals about a striking piece of real estate — the home with rounded walls and windows, hidden by its partially bermed construction — they will likely recognize the property they call the “Hobbit house.”

As a child who spent summers there with her parents and siblings, Karen Lightstone did not understand the nickname.

As an adult who decided with her family to sell the house, it finally clicked.

“I have a copy of The Hobbit, and I pulled it out when we were to put it on the market,” Lightstone said.

“And the whole opening paragraph of Chapter 1 talks about the round door opening to a long, tube-shaped hallway. The best rooms are on the left because that’s where all the windows were. And I was like, ‘Oh my Lord, this is exactly what they built.'”

Home hidden to keep from being ‘eyesore’ in landscape

The house was built by carving away half of a hill, Lightstone said, and pouring concrete between domes made of mesh and rebar.

Because the home is partially bermed, it’s hard to see — a conscious decision, made to keep the home from ruining the sweeping landscape.

“My parents were trying to figure out where a good spot would be. They really didn’t want it visible on the ridge. They didn’t want any of the neighbours to be able to just see this house, because to them, that would be a bit of an eyesore,” Lightstone said.

“I don’t know how they came to decide exactly how it was going to be. But I do know — from doing some trips with my dad and from conversations he had — they were always interested in something unique like that.”

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