An­a­lysts ad­vise cau­tion as Al­tria takes stake in Cronos

Regina Leader-Post - - FP REGINA - VAN­MALA SUBRA­MA­NIAM

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.

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