Caution urged on Cronos deal
Big Tobacco’s entry into the Canadian cannabis space is yielding mixed responses from analysts, some of whom are urging investors to view the $2.4-billion investment by Marlboro-maker Altria in licensed cannabis producer Cronos Group with a degree of caution.
“This is a company that outside of cannabis has some severe sentiment against it in terms of execution of its core business,” warned Stuart Rolfe, a special situations analyst with Veritas Investment Research in reference to Altria. “I’m not saying this deal is necessarily negative. I’m just saying exuberance can flip around.”
Altria’s 45-per-cent investment in Cronos — with an option of growing its stake to 55 per cent through warrants — sent Cronos’s shares soaring by more than 20 per cent in the first few hours of trading Friday. Altria’s stock had a much more muted response, rising just over one per cent as news of the deal broke.
As part of the deal, the Virginia-based tobacco company acquired 146.2 million newly issued shares for $16.25 each, a roughly 15-per-cent premium over Cronos’s closing price Thursday evening.
“Altria is very strong in the regulatory side, and understands how to brand in a tightly regulated market, whether in beverages or tobacco. That’s what makes a difference to us, and that’s what’s going to set a precedent,” said Mike Gorenstein, CEO of Cronos Group. “We do think one of the largest categories for the cannabis adult-use market will be vaporizers and that requires technical expertise. We can’t imagine a better partner than Altria on that front.”
Altria’s biggest tobacco holdings are Philip Morris USA Inc., U.S. Smokeless Tobacco Company LLC, and John Middleton Co. — all of which sell primarily to the U.S. market. That makes the company more likely to struggle with eroding market share, as it doesn’t have as much market access to the developing world where smoking rates are much higher. This year alone, Altria’s stock lost a quarter of its value.
The tobacco company also announced it would be discontinuing two of its e-vaping products, MarkTen and Green Smoke, which were geared toward consumers intent on cutting down cigarette use. “That was interesting to me. They are throwing in some portion of the towel in what should have been a growth area,” said Rolfe.