Welcome back to the deep dive. We have a really
fascinating story for you today. We're going
inside one of the world's most historically successful
and I think it's fair to say most controversial
corporations. This is a story about shedding
a toxic name making some truly billion dollar
bets and a long complicated legal battle that
really forced a fundamental change in how the
company operates. It really did. We're diving
into Altria Group Inc. Now for those of you who
might not recognize that corporate name. This
is the company that used to be known as Philip
Morris Companies, Inc. Today, it's this massive
American corporation behind some huge tobacco
names, mostly focused here in the U .S. market.
But its current structure is, well, it's a labyrinth
of spinoffs and strategic investments. And that
structure is exactly what makes this deep dive
so compelling. I mean, its main longest held
asset is still Philip Morris USA. That's the
domestic tobacco arm. But Altria is, you know,
it's no longer just a cigarette company. They
have these major stakes in the global brewing
giant AB InBev. They've plunged, what, $1 .8
billion into the Canadian cannabis market with
Kronos Group. And with a pretty startling irony,
they're now investing in specialized medical
research companies. It's an immense, powerful
financial entity. It's listed on the S &P 500,
which is a clear signal of its continued financial
dominance. Though it's worth noting a little
historical detail here. It used to be a component
of the Dow Jones Industrial Average, the DJIA,
but that was until 2008. The standoffs that year
were just so vast that it actually forced the
company's removal from that index. Okay, let's
unpack this. So we're looking at a company trying
really desperately to evolve its identity, but
it's carrying this huge amount of historical
baggage. We have to understand this. strategy
for escaping that past. And the name change from
Philip Morris to Altria, that feels like the
starting line. That baggage is the central and
I'd say inescapable tension here. The rebranding
to Altria happened back in 2003. And you have
to remember the context. This is right when the
legal and regulatory pressure against the tobacco
industry in the U .S. was, I mean, it was reaching
a fever pitch. Yeah. And when a company with
a name like Philip Morris, which is globally
recognized, a multi -billion dollar brand just
jettisons it. The public reason is never the
only reason. So what was the official story?
The stated goal, according to the company, was
to emphasize diversification. They argued that
the old name, Philip Morris Companies, Inc.,
it just narrowly defined them as a tobacco business.
But, you know, at the time they held this enormous
84 % stake in Kraft Foods on top of their massive
international operations. So Altrio was supposedly
created to reflect this bigger, more diverse
identity. The name itself comes from a Latin
root meaning high. sort of suggesting lofty values.
But the timing of it, right in the middle of
all these escalating lawsuits and public health
criticism, it just screams that the name change
was defensive. Was it really designed to mask
the association with tobacco? The sources we've
looked at strongly suggest that the external
perception was, yeah, it was heavily about damage
control. We actually have documentation from
the company's own branding consultants. the Worthland
Group. They noted internally that the name change
offered the possibility of masking the negatives
associated with the tobacco business. It was
an attempt at corporate insulation, trying to
shield those profitable food and international
assets from the perpetual political and legal
attacks aimed at U .S. tobacco. So if the tobacco
division gets hit with another massive lawsuit,
this new diversified corporation, Altria, it
just looks a little cleaner to Wall Street and
to the public. It's a corporate shield built
on semantics. That is precisely the motivation.
And the irony in the name choice is it's almost
astounding. Altria claimed it meant high, but
the renowned linguist Steven Pinker was. let's
just say highly critical of this attempt at corporate
spin. He called it an egregious example of phonesthesia.
Okay, let's pause on that term, phonesthesia.
For you listening, what exactly does that mean
in this context? Phonesthesia is the association
of certain sounds in a word with specific meanings,
often subconsciously. So think of words that
start with gluh, like glimmer or gleam. They
often relate to light. In Altria's case, it has
the first four letters of altruism, A -L -T -R.
Pinker's argument was that the company was actively
trying to exploit this linguistic similarity
to and I'm quoting here switch its image from
bad people who sell addictive carcinogens to
a place or state marked by altruism and other
lofty values that. is a critical insight so they
weren't just changing the label on the can they
were attempting to perform a kind of linguistic
baptism to wash away decades of controversy hoping
the new name would imply virtue and that right
there sets up the whole critical lens for this
deep dive how much of altria's strategy today
is genuine evolution and how much is just sophisticated
corporate spin to keep the core business going
the name change in 2003 was really just the beginning
the next big move was this radical almost surgical
restructuring of the whole corporate body that
between 2007 and 2008. Altria executed two massive
spin -offs. Why the immediate and drastic need
to divide the company? Well, the main driver
was really two -fold. Legal insulation and, of
course, maximizing shareholder value. The U .S.
legal environment was just becoming toxic and
unpredictable for the tobacco industry. So by
dividing up the empire, Altria could separate
its high litigation U .S. core from the potentially
higher growth, lower regulatory risk international
and non -tobacco businesses. OK, so let's detail
that first major spinoff, the divestiture of
the food giant. Right. That was Kraft Foods Inc.
In March of 2007, Altria spun off its remaining
88 .1 % stake. They distributed those shares
directly to Altria shareholders. This really
completed a long process of decoupling itself
from that huge food conglomerate. And the strategic
reasoning is pretty clear. Kraft was stable,
valuable, non -controversial. But its stock valuation
was arguably being dragged down by all the political
and legal baggage of its parent tobacco company,
separating them unlocked value for shareholders.
And the second spinoff, Philip Morris International,
that was even more pivotal for the future of
the tobacco industry, right? Absolutely. In March
2008, the entire international arm, Philip Morris
International, or PMI, was spun off. Altria basically
just distributed all of PMI's shares to its existing
stockholders. This created two completely separate
publicly traded tobacco giants. And it was, you
know, a masterstroke of financial engineering.
It was designed to insulate those lucrative global
profits from these crippling U .S. litigation
judgments. That division though, it must have
had major operational consequences, especially
for the U .S. workforce and the manufacturing
base. That's a detail that often gets lost in
the big financial press releases. The consequences
were immediate and they were severe. As soon
as PMI became independent, its former subsidiaries,
which were massive buyers of U .S. grown and
manufactured tobacco products, they just stopped
those purchases. And the loss of that colossal
international demand, it created an immediate
glut of capacity in U .S. operations. Wow. That
sounds like a direct hit to the domestic production
line. What was the immediate fallout on the ground,
particularly in the U .S. manufacturing heartland?
The immediate result was painful. Starting around
2007, it led directly to the closure of a modern,
newly renovated plant. in North Carolina. And
across the board, Altria's U .S. manufacturing
capacity saw about a 50 % reduction. This triggered
huge layoffs, induced early retirements, a massive
workforce reduction that affected thousands of
employees and contractors in Richmond and North
Carolina. The human cost of that spinoff was
substantial. It's the price of division, essentially.
They paid for their legal and financial insulation
with American manufacturing jobs. And meanwhile,
they also finalized the move of the corporate
headquarters. Yes. The headquarters officially
relocated in 2008 from Midtown Manhattan, New
York City to Henrico County, Virginia. The timing
was strategic. They consolidated their executive
function right next to their massive operational
footprint. The company claimed this was a pure
cost -saving measure. Was that the main driver
or was there more to it? Cost savings were certainly
paramount. A spokesperson at the time estimated
the move would save the company over $60 million
a year just by trading expensive New York City
corporate infrastructure for lower -cost Virginia
operations. But it also reflected a practical
reality. The vast majority of their operational
research and manufacturing staff had been based
in or around Richmond for decades. Moving the
executive core there to streamline decision making
and reinforce the corporate ID with the tobacco
heartland. And the sheer physical footprint they
have in the Richmond area is substantial. That
makes the move seem pretty logical. It's still
massive. The headquarters is in Henrico County.
More importantly, they have the Altria Center
for Research and Technology in downtown Richmond.
That's a vast 400. 150 ,000 square foot, $350
million facility that houses roughly 600 scientists
and engineers. Plus the manufacturing center
in South Richmond, which despite those closures
we just mentioned, is still a critical operational
hub. So the immediate result of this division
is maybe the most telling metric. When these
two corporate entities, Altria and Philip Morris
International emerged, which one did the market
judge to be the bigger financial force? The global
arm, PMI. proved immediately dominant. Just two
years after the split, in 2010, the remaining
domestic company, Altria Group, was ranked at
fortune number 137. Its former asset, Philip
Morris International, ranked significantly higher
at 94th. So this shows that while Altria kept
the brand heritage in the U .S., the truly massive
growth potential and operational value unencumbered
by U .S. litigation risks went with... PMI. So
Altria kept the legal risk and the domestic market,
while PMI took the financial engines and the
global market potential. The strategy was crystal
clear. Compartmentalize the risk by severing
the operation. This corporate shuffling, the
rebrand to Altria, the splitting of assets. It
was all happening against the backdrop of this
intensifying legal nightmare. Let's move to the
core of that legal reckoning now and the findings
of civil fraud. Right. And this is where we move
from corporate structure to corporate deception.
The pressure really culminated in that powerful
2006 federal court ruling. It didn't just find
them. It established guilt. Altria, along with
R .J. Reynolds and others, was found guilty of
civil fraud and racketeering. Racketeering. That's
a serious charge usually reserved for organized
crime. What specific acts of sustained deception
did the court identify to warrant that kind of
finding? Well, the finding covered decades of
systematic denial about the health effects of
smoking and secondhand smoke. But one specific,
highly publicized element involved the fraudulent
marketing of light and low -tar cigarettes. The
idea being that the public was deceived into
thinking these products were safer, correct?
Precisely. For example, a lawsuit claimed this
marketing constituted fraudulent misrepresentations
under the Maine Unfair Trade Practices Act, or
MUTPA. The core finding was that the companies
knew these products were not safer. In fact,
because of the way smokers changed their behavior,
you know, taking deeper drags or smoking more
often to get the nicotine dose they needed, the
risk was often the same or even higher. But the
truly shocking revelation. The thing that exposed
the calculated nature of the addiction wasn't
just about marketing lies. It was about the fundamental
chemistry of the product itself. This is where
we need to get into the technical details uncovered
in that ruling. This is the most crucial takeaway
from the 2006 case. The court found evidence
of a deliberate, highly sophisticated strategy
of chemical manipulation and was designed specifically.
to maximize product dependence. How exactly was
that articulated in the court findings? The findings
stated, and I'm quoting here, that the defendants,
quote, altered the chemical form of nicotine
delivered in mainstream cigarette smoke for the
purpose of improving nicotine transfer efficiency
and increasing the speed with which nicotine
is absorbed by smokers. So this wasn't about
adding flavor or making the tobacco burn better.
It was about engineering the drug delivery mechanism
itself. Wait, they were engineering the speed
of the high? They were essentially optimizing
the rush that creates addiction? How did they
do that? How did they achieve that faster absorption
rate? The mechanism was manipulating the smoke's
pH. And they did this by adding a common chemical
compound ammonia to the tobacco. In chemistry,
this process is known as freebasing. That term,
freebasing, it carries instant connotations of
increasing the potency and delivery speed of
controlled substances. Explain exactly how adding
ammonia does this in a cigarette. So nicotine
exists in two forms, a salt form and a freebase
form. The nicotine in its natural salt form,
which is what you find in raw tobacco, is less
volatile. It's absorbed pretty slowly by the
body. By adding ammonia, you increase the alkalinity,
you raise the smoke pH. This chemical shift converts
the nicotine into its highly volatile freebase
form. And what does that freebase form do once
it hits the lungs? Freebase nicotine is far more
easily absorbed through the membranes of the
lungs and the respiratory tract. It hits the
bloodstream much, much faster and reaches the
brain more quickly. The court found that this
manipulation caused smokers to be exposed to
higher internal nicotine doses and become more
addicted to the product. It's an artificially
enhanced rapid dose delivery system. This is
the aha moment that was revealed in court. And
the timeline here is critical for that racketeering
charge. When did the company know this manipulation
maximized addiction and who authorized it? Internal
documents that came out during litigation showed
that these companies have been researching the
effects of ammonia additives since the 1970s
and 80s. They were documenting its impact on
nicotine uptake and addictiveness. The court
found this was a calculated, long -term strategy.
And the racketeering charge comes from the fact
that they implemented this sophisticated chemical
strategy to maximize dependence while at the
same time engaging in these public disinformation
campaigns, stating under oath that they were
just selling a legal product and disputing the
science linking smoking and disease. They knew
their public statements were false. The sophistication
of the fraud is what's so stunning. They weren't
just neglecting to warn people. They were actively
and chemically engineering the fraud. their product
to ensure maximum rapid addiction right up to
the point where they tried to rebrand themselves
as Altria, suggesting altruistic values. The
duality is staggering. The legal finding confirms
a deliberate, hidden, chemically optimized product
designed for dependence running in direct opposition
to the lofty values they claim the corporate
rebrand represented. This historical foundation
is crucial for understanding the high risk decisions
they're making today. With the public health
landscape shifting so dramatically, litigation
costs soaring and their international engine
now totally separate. Altria had to pivot. Aggressively
toward new revenue streams. And this has resulted
in a series of extremely high stakes, volatile
acquisitions in what they call next generation
nicotine and related markets. Right. Their early
diversification attempts before the massive e
-cig push focused on consolidating adjacent markets.
So in 2009, they bought UST Inc. This was key
because it ended any internal competition and
brought the dominant smokeless tobacco brands
Copenhagen and Skoll under their U .S. smokeless
tobacco company banner. It cemented their domestic
dominance in that sector. It also included their
wine business, Chateau Saint -Michel, which was
a nice non -controversial asset. But their internal
attempts to catch the e -cigarette wave, they
failed. They couldn't innovate successfully in
-house. That's a crucial failure point. Altria
launched its own e -cigarettes, the Mark 10 and
Green Smoke brands, but they really struggled
to gain any market share against the emerging
competitors. They eventually just discontinued
both brands in December of 2018. And that failure
set the stage for one of the most volatile financial
decisions in recent corporate history. Which
brings us to the famous or maybe infamous JUL
Labs acquisition. This was the moment Altria
decided that if they couldn't build it, they
would just buy the fastest growing player in
the space. In December 2018, Altria finalized
the acquisition of a 35 % minority stake in JUL
Labs for a colossal $12 .8 billion. And to put
that number in perspective for you, that was
more than the entire gross domestic product of
several small nations at the time. It was a staggering
bet that the e -cigarette market would just continue
its exponential unregulated growth forever. That
valuation was clearly the high watermark for
the company's market cap, which was valued at
over $118 billion that same month. They were
riding the euphoria of disruption. But the speed
of the subsequent collapse of that value is truly
astonishing. The investment aged poorly and instantaneously.
Regulatory scrutiny driven largely by concerns
over youth vaping and flavored products intensified
almost immediately after the deal closed. Less
than a year later, in November 2019, Altria was
forced to take a massive $4 .5 billion write
-down on that investment. A $4 .5 billion paper
loss in under 12 months. That just shows you
how volatile and regulatory dependent this modern
nicotine market really is. And it kept falling.
By July of 2022, the investment was reported
to be worth only 5 % of the original $12 .8 billion.
They essentially lit over $12 billion on fire
in less than four years. This wasn't just a bad
investment. It was a crisis of valuation and
market timing, stemming from the fact that Altria
completely misjudged the coming regulatory hammer.
Despite that staggering near -total loss, did
Altria just walk away? Or did they maintain the
belief that e -cigarettes were essential to their
future? They maintained their commitment, at
least for a while. They announced they would
continue supporting Juul and avoid investing
in competing products. It was a signal of their
dedication to see the investment through the
regulatory challenges. But eventually, you know,
market necessity forced their hand. And they
pivoted to what they hope will be the new guard.
Exactly. They returned to the e -cigarette market
by acquiring NJJY Holdings, Inc. They completed
that deal on June 1st, 2023. This marks a strategic
shift. They're focusing on products that have
potentially stronger regulatory positioning in
the U .S. market. It demonstrates that e -vapor
is still a fundamental, irreplaceable part of
their diversification strategy, regardless of
how much the initial failure costs them. And
beyond e -cigarettes, Altria is also betting
aggressively on entirely new, less traditional
nicotine delivery systems, specifically heated
tobacco and branching out into the completely
non -nicotine areas. The heated tobacco segment
is their long -term wager. In October 2022, Altria
entered a joint venture with Japan Tobacco, creating
a company called Horizon Innovations LLC. Altria
has a 75 % stake, Japan Tobacco 25. And their
primary goal with Horizon Innovations is to tackle
the U .S. market with plume -heated tobacco sticks.
What's the expected timeline for this? The timeline
really illustrates the complexity of dealing
with the FDA. They anticipate needing FDA approval,
which was expected to take until 2025. This means
customer sales aren't even projected to begin
until 2027. It's a six to nine year plan from
inception to widespread sales, which signals
how serious they are about transitioning away
from traditional combustibles, but also how slow
that transition will be. OK, now let's look at
the completely non -nicotine diversification,
which ranges from recreational substances to
serious medical research. Altria maintains substantial
minority stakes in these controversial or adjacent
fields. The largest non -nicotine investment
was in 2018 when they acquired a 45 % stake in
the Canadian cannabis company Kronos Group for
$1 .8 billion. This gives them exposure to the
North American recreational and medical cannabis
market, positioning them for potential future
U .S. federal legalization. And finally, the
most darkly ironic element of their diversification,
the investment in companies dedicated to treating
the conditions that their core product exacerbates.
This is the ultimate expression of the Altria
duality. As of 2024, they've invested in science
and medical companies that develop products for
conditions caused or aggravated by smoking. For
instance, they're invested in Lexaria Bioscience,
which is a developer of proprietary drug delivery
technology called Dehydratech. So their core
business is based on chemically optimizing nicotine
delivery into the bloodstream for addiction.
And now they're investing in optimizing drug
delivery technology for therapeutic purposes.
Yes. They also invested in Micreos, a biotech
company focused on recombinant proteins for chronic
dermatology and oncology conditions. The company
that was federally convicted of racketeering
for chemically enhancing addiction is now investing
in potential cancer treatments. It's a closed
-loop system of profit and purpose that just...
defies easy categorization. To understand how
Altria can fund a multi -billion dollar cannabis
stake, a failed $12 .8 billion e -cigarette bet,
and continue to operate a freely litigated core
business, we have to look at the foundational
financial power of the company. I mean, historically,
Altria and its predecessors were noted as among
the best performing publicly traded companies
of the entire 20th century. This gives them immense
stability and, you know, very deep pockets. Despite
the massive write downs and all the corporate
surgery, what does that financial picture look
like today? Is the core tobacco business still
generating enough cash to fuel these erratic
high risk bets? Oh, yeah. The core business is
still an enormous cash cow. If we review the
key 2024 financials, the scale of profitability
is clear. Revenue was $24 .02 billion, operating
income was $11 .24 billion, and net income was
$11 .26 billion. These are immense figures that
speak to the consistent, stable, and highly profitable
nature of the domestic tobacco market. But those
stable figures hide the incredible volatility
that the diversification strategy introduced,
especially with the JUL failure. We need to zero
in on how that financial shockwave actually manifested.
The net income figures perfectly illustrate the
corporate roller coaster. So in 2018, before
the full impact of the JUL investment hit, net
income was a very healthy $6 .95 billion. But
look at what happens in 2019. The company reported
a massive net loss of negative $1 .3 billion.
A loss that year after decades of almost ceaseless
profit. That negative $1 .3 billion is the direct
financial consequence of this spectacular failure
to value JUL correctly. It is the absolute clear
indicator of the cost of that failure. It confirms
that a single strategic misstep in diversification
can wipe out more than a year's worth of profit
and temporarily derail the entire financial picture.
But the stability of the legacy business quickly
cushioned the blow. By 2020, they had rebounded
dramatically to a net income of 4 .4%. This just
shows the company's massive risk appetite. They
can sustain losses that would bankrupt most other
companies and still return to profitability within
a year, funded entirely by the cash flow from
combustible tobacco products. And that wealth
translates directly into immense political influence.
Their engagement in Washington isn't supplemental.
It's existential. When your product is chemically
engineered for addiction and you face constant
regulatory threats, you have to become an influential
force in policy just to survive. And to ensure
your future products, like e -cigs and heated
tobacco, face a favorable regulatory path. Let's
quantify that lobbying power for you listening.
What kind of resources are we talking about here?
The figures are staggering. The Center for Public
Integrity documented that Altria spent approximately
$101 million lobbying the U .S. government between
1998 and 2004 alone. That expenditure made them
the second highest lobbying spender of any organization
nationally during that specific critical period.
That speaks to a dedicated, systematic application
of capital aimed at influencing legislation.
And this influence goes far beyond just tobacco
laws. They delve into shaping the entire scientific
and political climate. For instance, tell us
more about their funding of climate change denial
groups. Altria notably funded the Advancement
of Sound Science Coalition. Now, on its face,
that name sounds neutral, but it was a lobbying
organization created to push back against the
scientific consensus on anthropogenic climate
change. Why would a tobacco company spend money
fighting climate science? How does that connect
to selling cigarettes? It's a deeply strategic
move. By funding groups that question climate
science, Altria contributes to a larger political
ecosystem that's dedicated to promoting skepticism
about all government -backed or consensus -driven
science, especially when that science leads to
restrictive regulations. If they can sow doubt
about climate findings, it makes it easier to
sow doubt about public health findings regarding
smoking, disease, or the addictive properties
of nicotine. It's an exercise in regulatory preemption
and general scientific distrust. They also maintain
extremely close ties with powerful conservative
legislative organizations that focus on state
-level policy. Correct. Daniel Smith represents
Altria on the private enterprise board of the
American Legislative Exchange Council, or ALICI.
This is not a passive membership. ELISA -IC is
highly influential because it functions as a
body that drafts and promotes model legislation
that conservative state lawmakers can then introduce
in their own state capitals. By being on this
board, Altria directly influences the drafting
of favorable, pro -business legislation across
dozens of states at once, making sure local regulatory
threats are minimized. And their engagement reaches
the absolute highest levels of U .S. governance.
It does. For instance, Altria was recently listed
as a major donor, funding the White House's East
Wing demolition and the planned building of a
new ballroom in 2025. These are high -profile
access -granting donations that just underscore
their persistent effort to maintain relationships
and influence at the very apex of U .S. political
activity. So in short, their political footprint
is an elaborate defense system. It shields the
highly profitable core business, it combats adverse
public health science, and it clears the path
for their highly regulated new generation of
products like heated tobacco and e -cigarettes.
It is a necessity of their business model. After
being federally charged with racketeering, the
only way to pivot into new highly regulated markets
is by making sure you have a highly sophisticated,
multi -million dollar political defense mechanism
running continuously in the background. So. Let's
synthesize the journey of Altria Group for you.
We've tracked a company that attempted to chemically
enhance addiction for decades, then tried to
shed its controversial past with a strategic
rebrand, moving from Philip Morris to Altria,
hoping to evoke lofty values. And this transition
was financed by the surgical spinoff of major
assets, including Kraft and that massive international
engine, PMI. That new identity, however, could
not outrun the past. The 2006 legal reckoning
revealed a shocking level of deliberate, chemically
sophisticated product design. The use of ammonia,
the freebasing process, aimed specifically at
maximizing nicotine transfer and speeding up
addiction, all while maintaining public disinformation
campaigns. The modern Altria, therefore, is defined
by its massive, high -risk financial bets on
non -traditional tobacco and adjacent markets.
We saw the profound financial turbulence from
the disastrous $12 .8 billion And through all
this financial volatility, the company maintained
its foundational status as a powerhouse, capable
of sustaining multi -billion dollar losses. And
it continues to project its substantial political
influence across scientific policy, state legislation
via groups like ALX, and national politics, ensuring
the survival of its ability to to market and
sell nicotine. It's a company that has strategically
divided itself, chemically optimized its product,
and diversified into the most forward -looking
yet controversial sectors cannabis and, most
ironically, medical research focused on treating
chronic illnesses. And this leads us back to
the inherent foundational conflict we discussed
right at the start, connecting all the threads
for you as we close this deep dive. Altria operates
worldwide. and is a major producer of tobacco,
cigarettes, and products chemically engineered
for addiction. Yet it's now investing heavily
in medical products and biotech companies designed
for the treatment of chronic illnesses, including
those caused by tobacco. If we connect this to
the bigger picture, it raises an important question.
As the company expands its portfolio to include
potentially therapeutic or wellness -focused
investments, can a business fundamentally known
for creating and chemically engineering addiction
successfully pivot its entire corporate purpose
and public perception? Or is the original core
conflict between profit and public health an
inescapable part of its corporate DNA? A profound
question about corporate ethics and the limits
of rebranding. Thank you for joining us for The
Deep Dive. We'll see you next time.