Investments in Equity Securities

3 Months Ended

Mar. 31, 2019

Investments [Abstract]

Investments in Equity Securities

Investments in Equity Securities:

Altria’s investments consisted of the following:

	Carrying Amount
	March 31, 2019		December 31, 2018
	(in millions)
AB InBev	$	17,476	$	17,696
JUUL	12,800		12,800
Cronos (1)	1,739		—
Total	$	32,015	$	30,496

⁽¹⁾ Includes investment in Acquired Common Shares ($397 million), the Cronos warrant ($949 million) and the Fixed-price Preemptive Rights ($393 million) as discussed further below.

Investment in AB InBev

At March 31, 2019, Altria had a 10.1% economic and voting interest of AB InBev, consisting of 185 million restricted shares of AB InBev (the “Restricted Shares”) and 12 million ordinary shares of AB InBev. Altria accounts for its investment in AB InBev under the equity method of accounting because Altria has the ability to exercise significant influence over the operating and financial policies of AB InBev, including having active representation on AB InBev’s Board of Directors (“AB InBev Board”) and certain AB InBev Board committees. Through this representation, Altria participates in AB InBev policy making processes.

At December 31, 2018, AB InBev had derivative financial instruments used to hedge the share price related to 92.4 million of its share commitments. AB InBev’s share price in Euros at March 31, 2019 and December 31, 2018 was €74.76 and €57.70, respectively. Consistent with the one-quarter lag for reporting AB InBev’s results in Altria’s financial results, Altria will record its share of AB InBev’s first quarter 2019 mark-to-market gains associated with these derivative financial instruments in the second quarter of 2019.

Altria reviews its investment in AB InBev for impairment by comparing the fair value of its investment to its carrying value. If the carrying value of Altria’s investment exceeds its fair value and the loss in value is other than temporary, the investment is considered impaired and impairment is recognized in the period identified. The factors used to make this determination include the duration and magnitude of the fair value decline, AB InBev’s financial condition and near-term prospects, and Altria’s intent and ability to hold its investment in AB InBev until recovery.

The fair value of Altria’s equity investment in AB InBev is based on: (i) unadjusted quoted prices in active markets for AB InBev’s ordinary shares and was classified in Level 1 of the fair value hierarchy and (ii) observable inputs other than Level 1 prices, such as quoted prices for similar assets for the Restricted Shares, and was classified in Level 2 of the fair value hierarchy. Altria may, in certain instances, pledge or otherwise grant a security interest in all or part of its Restricted Shares. In the event the pledgee or security interest holder forecloses on the Restricted Shares, the relevant Restricted Shares will be automatically converted, one-for-one, into ordinary shares. Therefore, the fair value of each Restricted Share is based on the value of an ordinary share.

The fair value of Altria’s equity investment in AB InBev at March 31, 2019 and December 31, 2018 was $16.6 billion and $13.1 billion, respectively, compared with its carrying value of $17.5 billion and $17.7 billion, respectively. At March 31, 2019, the fair value of Altria’s equity investment in AB InBev was less than its carrying value by 5%, as compared to 26% at December 31, 2018. At April 18, 2019, the fair value of Altria’s equity investment in AB InBev approximated its carrying value. Based on Altria’s evaluation of the factors identified above, Altria concluded that the decline in fair value of its investment in AB InBev below its carrying value at March 31, 2019 is temporary and, therefore, Altria has not recorded any impairment.Investment in JUUL

In December 2018, Altria, through a wholly-owned subsidiary, purchased shares of JUUL’s non-voting Class C-1 Common Stock for an aggregate price of $12.8 billion, which will convert automatically to shares of voting Class C Common Stock upon antitrust clearance, and a security convertible into additional shares of Class C-1 Common Stock or Class C Common Stock, as applicable, for no additional payment upon settlement or exercise of certain JUUL convertible securities (the “JUUL Transaction”). At March 31, 2019, Altria owned 35% of the issued and outstanding capital stock of JUUL.

Upon Share Conversion, Altria will possess 35% of JUUL’s outstanding voting power, except to the extent that Altria’s percentage ownership has decreased, and have the right to designate one-third of the members of the JUUL Board of Directors, subject to proportionate downward adjustment if Altria’s percentage ownership falls below 30%.

Altria received a broad preemptive right to purchase JUUL shares to maintain its ownership percentage and is subject to a standstill restriction under which it may not acquire additional JUUL shares above its 35% interest. Furthermore, Altria agreed not to sell or transfer any of its JUUL shares for six years from December 20, 2018.

At March 31, 2019, Altria accounted for its investment in JUUL as an investment in an equity security. Since the JUUL shares do not have a readily determinable fair value, Altria has elected to measure its investment in JUUL at its cost minus any impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There have been no such upward or downward adjustments to the carrying value of Altria’s investment in JUUL resulting from observable price changes since the JUUL Transaction. Upon Share Conversion, Altria expects to account for its investment in JUUL under the equity method of accounting.Investment in Cronos

On March 8, 2019, Altria, through a subsidiary, completed its acquisition of:

▪ 149.8 million newly issued common shares of Cronos (“Acquired Common Shares”), representing a 45% economic and voting interest.

▪ anti-dilution protections to purchase Cronos common shares to maintain its ownership percentage. Certain of the anti-dilution protections provide Altria the ability to purchase additional Cronos common shares at a per share exercise price of CAD $16.25 upon the occurrence of specified events (“Fixed-price Preemptive Rights”). Based on Altria’s assumptions as of March 31, 2019, Altria estimates the Fixed-price Preemptive Rights will allow Altria to purchase up to an additional approximately 40 million common shares of Cronos.

▪ a warrant providing Altria the ability to purchase up to an additional approximately 74 million common shares of Cronos at a per share exercise price of CAD $19.00, which expires on March 8, 2023.

The total purchase price for the Acquired Common Shares, Fixed-price Preemptive Rights and warrant (collectively, “Investment in Cronos”) was CAD $2.4 billion (USD $1.8 billion). Upon full exercise of the Fixed-price Preemptive Rights, to the extent such rights become available, and the warrant, Altria would own a maximum of 55% of the outstanding common shares of Cronos.

In accounting for the acquisition of these assets as of the date of closing, the Fixed-price Preemptive Rights and warrant were recorded at each of their fair values using Black-Scholes option-pricing models, based on the assumptions described in Note 5. Financial Instruments. In addition, a deferred tax liability related to the Fixed-price Preemptive Rights and warrant was recorded. The residual of the purchase price was allocated to the Acquired Common Shares. Accordingly, the CAD $2.4 billion (USD $1.8 billion) purchase price was recorded in USD as follows:

▪ $1.2 billion to the warrant;

▪ $0.5 billion to the Fixed-price Preemptive Rights;

▪ $0.4 billion to the Acquired Common Shares; and

▪ $0.3 billion to a deferred tax liability.

For a discussion of derivatives related to Altria’s Investment in Cronos, including Altria’s accounting for changes in the fair value of these derivatives, see Note 5. Financial Instruments.

At March 31, 2019, Altria had a 45% economic and voting interest in Cronos, which Altria accounts for under the equity method of accounting. Altria reports its share of Cronos’s results using a one-quarter lag because Cronos’s results are not available in time for Altria to record them in the concurrent period. As a result of the one-quarter lag, no earnings/losses from Altria’s equity investment in Cronos were recorded for the quarter ended March 31, 2019.

Altria nominated four directors, including one director who is independent from Altria, who were elected to serve on Cronos’s seven member Board of Directors.