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ALTRIA GROUP, INC.

(MO)
  Report
Delayed Nyse  -  01:02 2022-11-25 pm EST
44.74 USD   -0.62%
11/14Altria Group, Inc. : Other Events, Financial Statements and Exhibits (form 8-K)
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Altria Group/JUUL Labs: An Antitrust Violation For Antitrust Clearance Strategy And Transaction Non-Competes?

09/12/2022 | 12:11pm EST

The FTC's challenge of Altria Group's proposed minority investment in JUUL Labs, Inc. (JLI) in April 2020 generated attention in both the mainstream media and the competition law press. Press coverage since that time has hit the latest developments but often missed the important issues this challenge raises: When can parties reach an anticompetitive agreement before they sign their official merger documents? Non-compete agreements have been pilloried lately, but are they anticompetitive even in a partial merger situation like this one?

This summary should help you prepare for the September 12 oral arguments in front of the Commissioners. You can read Steve Cernak's more detailed article on these issues for the Washington Legal Foundation here.

The Parties and the Transaction

Altria, together with its subsidiaries, is the largest and one of the oldest cigarette companies in the U.S. In addition to its other products, it also sold e-cigarettes during the relevant period. JLI, is a smaller, newer company focused only on e-cigarettes.

As with most antitrust matters, especially merger investigations, market definition was contentious. Generally, e-cigarettes are electronic devices that aerosolize nicotine-containing liquid using heat generated by a battery as the user puffs. Open system e-cigarettes contain a reservoir that a consumer can refill with their choice of a nicotine-containing liquid. Closed system e-cigarettes have a container that already contains that liquid. Closed systems include cig-a-likes, which mimic the shape and look of a traditional cigarette, as well as pod products that have various shapes, including a shape like a USB thumb drive.

The e-cigarette category began growing rapidly about ten years ago. A few companies offered different options. Altria offered cig-a-like products and then pod products, but JLI offered only pod products. At the time of the challenged transaction, pods were the dominant choice of consumers, with JLI's product the market leader.

While sales of pods, especially JLI's pods, grew strongly at the end of 2017, Altria was only selling cig-a-likes and their sales fell. For regulatory reasons, Altria sought to purchase an existing pod product because it couldn't develop its own product in a reasonable timeframe. In late 2017, it licensed the rights to a Chinese pod product and rushed it to market in early 2018.

Altria then approached JLI in early 2018 about an acquisition. By the end of July, the up-and-down negotiations centered around a multi-billion-dollar investment by Altria in exchange for a minority interest in JLI, possibly a non-voting interest convertible to voting after antitrust clearance. (An acquisition of non-voting securities does not require Hart-Scott-Rodino approval; conversion of such securities does.) At this point, the parties were far from reaching a deal, but began to discuss two other items that would lead to the FTC's challenge of the eventual transaction.

The ironic first issue was how the parties could obtain antitrust clearance for the entire transaction. The parties' term sheet described cooperation with the FTC and agreement to any "concessionary requirements of the FTC" related to Altria's e-cigarette business. That is, the parties agreed that Altria would "divest (or if divestiture is not reasonably practicable, contribute at no cost to [JLI] and if such contribution is not reasonably practicable, then cease to operate" Altria's e-cigarette business. JLI did not want to compete with Altria because Altria, as a major JLI shareholder, would have access to important JLI information. JLI's executives later testified that they expected the FTC to oversee this process.

Second, in exchange for regulatory aid, Altria would agree to not compete with JLI's e-cigarette products. Again, JLI didn't want Altria's to access sensitive JLI information when performing these services would allow Altria to improve its current e-cigarette products (before divestiture) or develop better new ones.

While negotiating over financial considerations and Altria's voting rights, the parties continued to refine these two items. In later term sheets, the requirement that Altria "cease to operate" its e-cigarette assets disappeared while the requirement that Altria either contribute those assets to JLI or divest them remained.

Negotiations broke down in early September, but improved in October as Altria came around to terms much closer to JLI's proposals. In early December, Altria announced that it was pulling its remaining e-cigarette products from the market, allegedly to conserve costs for product development or to invest in JLI. The parties finally reached an agreement later in December. Altria then ceased its other e-cigarette development efforts.

The Challenge and Initial Decision

On April 20, 2020, the FTC issued a two-count administrative complaint against the parties. Count I alleged an unreasonable agreement by which Altria agreed not to compete with JLI in the e-cigarette market "now or in the future" in exchange for the ownership interest in JLI. Specifically, that agreement took the form of the non-compete provisions of the written agreement as well as an agreement to exit the market reached during negotiations as a "condition for any deal." Count II alleged that the transaction, including the agreed upon market exit by Altria and the written non-compete provisions, violated Clayton Act Section 7's prohibition of mergers that "substantially lessen competition" in the relevant market.

Under the FTC's usual procedures, an FTC administrative law judge first heard the complaint. After substantial pre- and post-trial briefing and thirteen days of hearing in June 2021, the ALJ dismissed the complaint in February 2022. The FTC's complaint counsel immediately appealed to the Commissioners.

In the Initial Decision, the ALJ went through the usual market definition analysis and agreed with the FTC complaint counsel that the appropriate product market was the closed system e-cigarettes, both cig-a-likes and pod-based products. That was about the last time the ALJ agreed with complaint counsel.

The ALJ dismissed the Sherman Act Section 1 count, finding insufficient evidence of an agreement between the parties to have Altria exit the e-cigarette market in return for entering the transaction.

The ALJ also similarly dismissed both the Sherman Act Section 1 claim and Clayton Act Section 7 claim because the non-compete provision did not unreasonably restrain competition and the minority investment was not reasonably likely to substantially harm competition in the e-cigarette market. The ALJ accepted complaint counsel's expert's calculation of Altria's share of the market just before it exited the market; but, he found that that share had been dropping and so overstated Altria's likely competitive significance in the market going forward. The ALJ also rejected that expert's estimate of the disposition of Altria's customers after it left the market, instead crediting the actual diversion that occurred. As a result, the ALJ estimated that the transaction led to only a small change in concentration. Because Altria was not likely to be an effective actual or potential competitor even if the transaction did not occur, the ALJ found that the transaction did not substantially harm competition.

Antitrust Issues on Appeal

This case tees up several interesting antitrust issues for the FTC Commissioners. As in any Section 1 case, the question of agreement is key: Does this combination of communication followed by action add up to an agreement? The context for the communications is unusual here-negotiations specifically designed to reach an agreement that ultimately were successful. Even more importantly, some of the communications that complaint counsel finds most troubling are the preparations for FTC review of potential anticompetitive aspects of the deal and remedies for them. Enforcers have explicitly told parties to prepare such remedies in such situations. If such discussions can lead to successful allegations of illegal agreements, merger negotiators will need some guidance on how to safely do their jobs.

The Commissioners also must opine on a couple issues that have been in the antitrust news lately. In merger cases, how strong is the structural presumption? Here, the market shares as measured by complaint counsel's expert were high enough to trigger a presumption that would block the deal. The initial decision had some issues with the timing of those measurements, but its bigger objection was that those backward-looking shares said very little about future competition. Will Commissioners who have championed the strength of such presumptions agree?

Non-compete agreements have come under increasing scrutiny recently. But the history of such agreements being found reasonable in the merger context, if narrowly tailored, predates the Clayton Act. Can enforcers dead-set against them in other contexts accept them in a merger context? In this merger context?

Of course, the biggest antitrust issue is a most basic one for the FTC, one that the parties made sure to put in the opening sentence of their answering brief to the Commissioners: In the past 25 years, the Commission has not ruled against a complaint it voted to authorize. That enviable winning streak has generated complaints, even legal challenges, insisting that the FTC's processes are not fair to parties. So here, after a 250+ page opinion and finding of facts by a respected ALJ based on 20 witnesses, 2400 exhibits, and extensive briefing, will the Commission affirm the initial decision to demonstrate that it has not "rigged the rules" to always win? Or will they overturn it and keep the winning streak alive?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Steven Cernak
Bona Law PC
28175 Haggerty Rd
Novi
Detroit
MI 48377
UNITED STATES

© Mondaq Ltd, 2022 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source Business Briefing

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Financials (USD)
Sales 2022 20 792 M - -
Net income 2022 5 594 M - -
Net Debt 2022 24 733 M - -
P/E ratio 2022 14,2x
Yield 2022 8,22%
Capitalization 80 182 M 80 182 M -
EV / Sales 2022 5,05x
EV / Sales 2023 4,97x
Nbr of Employees 6 000
Free-Float 63,8%
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William F. Gifford Chief Executive Officer & Director
Salvatore Mancuso Chief Financial Officer & Executive Vice President
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Jody L. Begley Chief Operating Officer & Executive Vice President
Charles N. Whitaker SVP, Chief Human Resources & Compliance Officer
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