By Juliet Chung
Hedge fund Darsana Capital Partners recently wrote down its
investment in Juul Labs Inc. by more than a third and now holds it
at a price that values the e-cigarette company at $24 billion, said
people familiar with the matter.
The New York firm is one of a number of hedge funds that rode
Juul to big gains last year on the back of a December deal by
tobacco company Altria Group Inc. that instantly made Juul one of
the most valuable startups in the U.S.
Juul doubled to a $38 billion valuation in the span of six
months last year.
But a drumbeat of negative developments last month have clouded
the company's prospects.
They include a proposed federal ban on vape flavors that make up
80% of Juul's domestic sales amid continued growth in youth vaping,
a decision by Walmart Inc. to stop selling all e-cigarettes in its
U.S. stores, and investigations by the Federal Trade Commission,
the Food and Drug Administration and several state attorneys
general into Juul's marketing.
A mysterious vaping-related lung illness the Centers for Disease
Control and Prevention estimates has sickened more than 1,000 and
resulted in 18 deaths has also cast a chill over the industry. The
CDC has recommended people stay away from vaping altogether for now
and has singled out THC-containing products specifically.
Juul investors are facing more than a billion in potential
collective losses this year, according to some estimates.
A Juul spokesman said, "We are focused on earning the trust of
regulators, policy makers and other stakeholders...and supporting
and complying with FDA's final effective flavor guidance."
Besides Darsana, investors include Capital Group, which invested
in Juul through one of the biggest mutual funds in the U.S., Coatue
Management, D1 Capital Partners, Fidelity Investments, Marianas
Fund Management, Tiger Global Management and funds of funds Morgan
Creek Capital Management in Chapel Hill, N.C., and Private Advisors
in Richmond, Va., said people familiar with the matter.
A $150-a-share dividend paid out to investors in December as
part of the Altria deal means many investors are still up overall,
even at a $24 billion valuation for Juul. That includes Darsana,
said people familiar with the matter. Recent investors Altria and
mutual-fund complex Capital Group, which bought most of Fidelity's
stake earlier this year in a deal that valued Juul at $38 billion,
would fare among the worst.
Spokesmen for Altria and Capital Group declined to comment.
Juul helped boost the returns of its hedge-fund investors last
year in a generally tepid year for the industry. It made up nearly
half the 14% returns of Tiger's hedge fund last year and took D1
from a slight loss to a 5% return, said people familiar with the
matter.
It contributed more than half the returns of Darsana, which
posted an 11.9% gain last year, said people familiar with the
matter. Darsana also has a special-purpose vehicle dedicated to
Juul.
The supercharged gains last year by hedge funds that had
invested in Juul drew envy from some other funds, and seemed to be
a stark example of the benefits of venturing into private markets.
Juul drew a bevy of other investors as well, including Stanley
Druckenmiller, Robert Pohly of Samlyn Capital, Tao Capital
Partners, the family office of Juul director Nicholas Pritzker,
Jeffrey Lin of Sculptor Capital Management, previously known as
Och-Ziff Capital Management, and the Wolfson family, a New York
real-estate family that invests in hedge funds.
Investors have said they were drawn to the prospect of
disrupting Big Tobacco and helping to finance a safer way for
adults to get their nicotine fix, as opposed to cigarettes that
would expose bystanders to secondhand smoke.
But as the narrative around the company has changed to one
focused on Juul's popularity among youth and the growing addiction
of a new generation to nicotine, it has become a lightning rod for
controversy.
On a conference call with clients in July, a partner at Bay Area
hedge fund Light Street Capital cited the firm's decision not to
invest in Juul to highlight its comfort with another investment,
Unity, a development platform that aids in creating videogames and
apps.
The partner said Light Street hadn't invested in Juul for
ethical reasons related to minors vaping, said people familiar with
the call, but that it had no concerns around the ethics of
investing in Unity.
Questions about the future of Juul and vaping regulations
prompted Altria and Philip Morris International Inc. to call off
talks about a potential merger last week.
Darsana was founded by Anand Desai, a onetime analyst at
Donaldson, Lufkin & Jenrette who later was a partner at the
now-closed hedge fund Eton Park Capital Management. Darsana has
said it is still bullish about Juul in the long term, saying
increased regulation of e-cigarettes should clear out illicit
products and benefit Juul, according to people familiar with the
matter.
Juul's chief executive abruptly stepped down last week, and the
company said it would suspend all product advertising in the
U.S.
Juul has said its new CEO, Altria executive K.C. Crosthwaite, is
reviewing all practices and policies.
--Jennifer Maloney contributed to this article.
Write to Juliet Chung at juliet.chung@wsj.com
(END) Dow Jones Newswires
October 04, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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