In early April, the U.S. Federal Trade Commission (FTC) filed an administrative complaint alleging that Altria Group Inc. (NYSE: MO) and Juul Labs violated federal antitrust laws. Specifically, this referred to when Altria agreed in late 2018 to invest $12.8 billion in the e-cigarette maker. Under the terms of the investment agreement, Altria said it would not compete with Juul for six years.

By the time the FTC filed its complaint, the investment had soured. In the third and fourth quarters of 2019, Altria wrote down $8.6 billion of its stake in Juul.

The FTC complaint also followed an announcement by 39 state attorneys general of an investigation into the health risks associated with the Juul vaping products and how the company promotes the products to children. Nevada Attorney General Aaron Ford said at the time, “The 39-state coalition is investigating Juul’s marketing and sales practices, including targeting of youth, claims regarding nicotine content, and statements regarding risks, safety and effectiveness as a smoking-cessation device.”

Any action on the FTC complaint has been pushed out to as late as early March of next year due to the pandemic. Altria has declared that it intends “vigorously” to defend its investment in Juul.

However, Altria could get some public relations mileage from an unexpected source.

Could Smoking Help Combat COVID-19

A French study of smokers who showed symptoms of COVID-19 concluded that “active smokers may be protected against symptomatic COVID-19.” The study noted that the lower rate of infection likely was due to nicotine and not the smoke from burning.

The coronavirus enters into human cells by attaching itself to certain protein receptors (ACE2) found on some cells’ surfaces. The research suggests that the attached nicotine prevents the virus from attaching itself to these cells. That reduces the amount of virus that can attack a COVID-19 victim’s lungs.

French authorities are considering a further controlled study using nicotine patches.

In a press release in mid-May, WHO urged researchers, scientists and the media to be cautious about “amplifying unproven claims that tobacco or nicotine could reduce the risk of COVID-19. There is currently insufficient information to confirm any link between tobacco or nicotine in the prevention or treatment of COVID-19.”

A Beneficial Use of Tobacco Won’t Stop the FTC

The FTC is not going after the tobacco giant’s investment in Juul on health grounds, however. The agency is charging the company with violating the antitrust laws of the United States. According to the complaint, “During negotiations, [Juul] insisted, and Altria recognized, that Altria’s exit from the e-cigarette market was a non-negotiable condition for any deal. When Altria sought to weaken or remove any obligation to exit that market, JLI conveyed that any such attempt was completely unacceptable.”

In October of 2018, Altria began to withdraw its MarkTen competitor to Juul from the market. In early November, it announced a “decision to wind down the remainder of its e-cigarette business.” Less than two weeks later, the two companies reached an agreement, and on December 20, Altria announced its investment in Juul.

The FTC concludes that Altria and Juul “cannot show that the Transaction resulted in cognizable efficiencies sufficient to outweigh the competitive harm caused by Altria’s agreement to exit the relevant market.” As a result, the two firms have illegally restrained competition, violating the Sherman Act. They also “substantially lessened competition” violating the Clayton Act.

Altria and Juul later amended the original agreement to include an option that Altria may elect to be released from its noncompete obligation on two conditions. First is if federal law prohibits the sale of vape products for at least a year. Secondly, if Altria’s carrying value on its $12.8 billion investment does not retain more than 10% of its original value.

What Defense Can Altria Mount?

The FTC complaint cites a long paragraph in the agreement between Altria and Juul that prohibits the cigarette maker from participating in any way in the e-cigarette market. The deal does allow Altria to engage in business related to its MarkTen brand “as such business is presently conducted.” The business had been shut down already.

Altria also could argue that the investment in Juul was hedging its bet on its IQOS “heat-not-burn” system. If IQOS ended up being a hit, the Juul investment could have been sold or written off. If IQOS turned out to be a loser, then at least Altria had an e-cigarette to fall back on.

That could be a strong argument for Altria, given that its IQOS system has been challenged for patent violations. British American Tobacco PLC (NYSE: BTI) has sued Philip Morris International (NYSE: PM), Altria and Philip Morris USA for patent infringement. British American has no heated-tobacco product on the market but claims it holds five patents that apply to iQOS.

If Altria and Philip Morris eventually lose this argument, then the deal with Juul still could be salvaged. It’s not a particularly strong argument, but it could muddy up the waters.

Then there’s Altria’s $1.8 billion investment in pot grower Cronos Group Inc. (NASDAQ: CRON). Wall Street analysts believe that Altria overpaid for Cronos, which has a market cap of $2.3 billion. Cronos stock is down about 14% year to date, performing better than its 45% owner.

For the year to date, Altria stock is down nearly 20%, despite a quarterly dividend of $0.84 per share and a dividend yield of 8.6%. The company’s balance sheet shows more than $2 billion in cash and equivalents. Operating cash flow in the first quarter was about $8.7 billion.

Altria is also the largest S&P 500 company by market cap (around $73 billion) to pay a dividend yield above 8%.

What Altria does have going for it is the U.S. Food and Drug Administration’s (FDA’s) firm belief that any nicotine delivery system that does not involve burning tobacco is better than smoking cigarettes.

The investment in Juul was certainly due largely to Altria’s desire for a device that could immediately generate big revenues. Restrictions on the sale of e-cigarettes and pods have wiped out that hope. The IQOS system may be better than vaping, but without FDA approval, Altria and Philip Morris cannot boast of its benefits. Moreover, there is the FTC complaint.

Counting out a tobacco company has never proved to be a good bet over the long term. This time may be different.

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