Big Tobacco in­vests heav­ily in Cana­dian cannabis player

Cronos Group ar­ranges $2.4B place­ment with Al­tria

Stockwatch Daily - - FRONT PAGE - Mr. Mike Goren­stein re­ports

CRONOS GROUP Inc. has en­tered into a sub­scrip­tion agree­ment with Al­tria Group Inc. pur­suant to which Al­tria has agreed to make an ap­prox­i­mately $2.4-bil­lion eq­uity in­vest­ment in Cronos Group on a pri­vate place­ment ba­sis in ex­change for com­mon shares in the cap­i­tal of the com­pany. Al­tria will also re­ceive war­rants of Cronos Group that if fully ex­er­cised would pro­vide the com­pany with an ad­di­tional ap­prox­i­mately $1.4-bil­lion of pro­ceeds. The shares is­suable to Al­tria pur­suant to the sub­scrip­tion agree­ment will re­sult in Al­tria hold­ing an ap­prox­i­mately 45-per-cent

own­er­ship in­ter­est in Cronos Group (cal­cu­lated on a non-di­luted ba­sis), ex­er­cise of the war­rants would re­sult in in­cre­men­tal own­er­ship of 10 per cent for a to­tal po­ten­tial own­er­ship po­si­tion of 55 per cent. This strate­gic part­ner­ship pro­vides Cronos Group

with ad­di­tional fi­nan­cial re­sources, prod­uct de­vel­op­ment and com­mer­cial­iza­tion ca­pa­bil­i­ties, and deep reg­u­la­tory ex­per­tise to bet­ter po­si­tion the com­pany to com­pete, scale and lead the rapidly grow­ing global cannabis in­dus­try. “Al­tria is the ideal partner for Cronos Group, pro­vid­ing the re­sources and ex­per­tise

we need to mean­ing­fully ac­cel­er­ate our strate­gic growth,” said Cronos Group’s Mike Goren­stein, chair­man, pres­i­dent and chief ex­ec­u­tive of­fi­cer. “The pro­ceeds from Al­tria’s in­vest­ment will en­able us to more quickly ex­pand our global in­fra­struc­ture and dis­tri­bu­tion foot­print, while also in­creas­ing in­vest­ments in R&D and brands that res­onate with our con­sumers. Im­por­tantly, Al­tria shares our vi­sion of driv­ing long-term value through in­no­va­tion, and we look for­ward to con­tin­u­ing to dif­fer­en­ti­ate in this area. As one of the largest hold­ing com­pa­nies in the adult con­sumer prod­ucts sec­tor, Al­tria has decades of ex­pe­ri­ence in reg­u­la­tory, gov­ern­ment af­fairs, com­pli­ance, prod­uct de­vel­op­ment and brand man­age­ment that we ex­pect to lever­age, par­tic­u­larly as new mar­kets for cannabis open around the world.”

“In­vest­ing in Cronos Group as our ex­clu­sive partner in the emerg­ing global cannabis cat­e­gory rep­re­sents an ex­cit­ing

new growth op­por­tu­nity for Al­tria,” said Howard Wil­lard, Al­tria’s chair­man and chief ex­ec­u­tive of­fi­cer. “We be­lieve that Cronos Group’s ex­cel­lent man­age­ment team has built ca­pa­bil­i­ties nec­es­sary to com­pete glob­ally, and we look for­ward to help­ing Cronos Group re­al­ize its sig­nif­i­cant growth po­ten­tial.”

Ben­e­fits of the trans­ac­tion:

• Ac­cel­er­ates Cronos Group’s pace of growth and ex­pan­sion: The growth op­por­tu­ni­ties for Cronos Group are sig­nif­i­cant and ex­tend across the globe as mar­kets open. With Al­tria’s re­sources, Cronos Group ex­pects to be even bet­ter po­si­tioned to sup­port cannabi­noid in­no­va­tion, cre­ate dif­fer­en­ti­ated prod­ucts and brands across medic­i­nal and recre­ational cat­e­gories, and ex­pand its global foot­print and grow­ing pro­duc­tion ca­pac­ity.

• Bol­sters Cronos Group’s abil­ity to be an in­no­va­tion leader in the cannabis in­dus­try: Cronos Group’s re­search col­lab­o­ra­tions with Gingko Bioworks to de­velop cul­tured cannabi­noids and its part­ner­ship with the Tech­nion Re­search and De­vel­op­ment Foun­da­tion for can na bi no id-based skin­care treat­ments are just two re­cent ex­am­ples of how the Cronos Group in­tends to use in­no­va­tion and its grow­ing in­tel­lec­tual prop­erty port­fo­lio to de­velop new ap­pli­ca­tions for cannabi­noids across a range of prod­ucts and cat­e­gories. Al­tria shares Cronos Group’s com­mit­ment to in­no­va­tion, med­i­cal cannabis re­search and state-of-the-art prod­uct de­vel­op­ment.

• Lever­ages Al­tria’s prod­uct de­sign, man­u­fac­tur­ing, mar­ket­ing and dis­tri­bu­tion ca­pa­bil­i­ties and ex­per­tise: Cronos Group ex­pects to work with Al­tria to rapidly ex­pand its prod­uct of­fer­ings in mar­kets as reg­u­la­tions per­mit, in­clud­ing de­vice tech­nol­ogy. Al­tria has sig­nif­i­cant ex­per­tise that can serve as build­ing blocks for cannabis vape prod­ucts. Al­tria also brings con­sid­er­able ex­pe­ri­ence with large-scale man­u­fac­tur­ing au­to­ma­tion, pre­roll tech­nol­ogy and sup­ply chain man­age­ment. In ad­di­tion, by in­vest­ing the in­cre­men­tal cap­i­tal, Cronos Group ex­pects to en­hance its at­trac­tive­ness as a po­ten­tial partner to other medic­i­nal and con­sumer fo­cused partners that may work with the com­pany to fur­ther ex­pand its prod­uct of­fer­ings and dis­tri­bu­tion ca­pa­bil­i­ties for the ben­e­fit of its share­hold­ers.

• Pro­vides ex­per­tise in suc­cess­fully nav­i­gat­ing com­plex reg­u­la­tory land­scapes: Al­tria has a strong record of man­ag­ing mul­ti­fac­eted reg­u­la­tory, com­pli­ance and gov­ern­ment af­fairs en­vi­ron­ments re­lated to tax­a­tion, prod­uct reg­is­tra­tion, ship­ping and other le­gal is­sues that Cronos Group ex­pects to be able to lever­age as cannabis mar­kets de­velop and open around the world.

• Raises cap­i­tal at a pre­mium val­u­a­tion and de­liv­ers even greater up­side op­por­tu­ni­ties for Cronos Group share­hold­ers, em­ploy­ees and partners: Un­der the terms of the agree­ment, Al­tria has agreed to ac­quire 146.2 mil­lion shares at a price of $16.25 per share. The price per share rep­re­sents a 41.5-per-cent pre­mium to the com­pany’s 10-day vol­ume-weighted av­er­age price (VWAP) on the Toronto Stock Ex­change, end­ing Nov. 30, 2018, the last un­af­fected trad­ing day prior to when Cronos Group pub­licly dis­closed pre­lim­i­nary dis­cus­sions with Al­tria. The strate­gic in­vest­ment com­bined with Al­tria’s ex­per­tise and com­ple­men­tary ca­pa­bil­i­ties are ex­pected to bet­ter po­si­tion Cronos Group for sig­nif­i­cant growth and value cre­ation with ben­e­fits to all of the com­pany’s stake­hold­ers, in­clud­ing its hold­ers of shares, em­ploy­ees and partners.

Board rec­om­men­da­tion The board of di­rec­tors of Cronos Group, af­ter con­sul­ta­tion with its le­gal and fi­nan­cial ad­vis­ers, has unan­i­mously de­ter­mined that the trans­ac­tion is in the best in­ter­est of Cronos Group and is unan­i­mously rec­om­mend­ing that share­hold­ers vote in favour of the trans­ac­tion. The board has re­ceived an opin­ion from its fi­nan­cial ad­viser, Lazard Canada Inc., that as of the date thereof and sub­ject to the as­sump­tions, qual­i­fi­ca­tions and lim­i­ta­tions set forth therein, the con­sid­er­a­tion to be re­ceived by the com­pany pur­suant to the trans­ac­tion is fair, from a fi­nan­cial point of view, to the com­pany. Key trans­ac­tion terms Eq­uity in­vest­ment Pur­suant to the sub­scrip­tion agree­ment, Al­tria has agreed to ac­quire 146.2 mil­lion shares at closing at a price of $16.25 per share, which rep­re­sents a 41.5-per-cent pre­mium to the 10-day VWAP of the shares on the TSX on Nov. 30, 2018, the last un­af­fected trad­ing day prior to when Cronos Group pub­licly dis­closed pre­lim­i­nary dis­cus­sions with Al­tria. Al­tria will also re­ceive war­rants at closing en­ti­tling it to ac­quire up to an ad­di­tional 10-per-cent own­er­ship po­si­tion in the com­pany ex­er­cis­able from time to time, for a pe­riod of four years fol­low­ing closing for an ex­er­cise price of $19 per share, which rep­re­sents an im­plied pre­mium of 65.5 per cent to the 10-day VWAP of the shares on the TSX on Nov. 30, 2018. Al­tria’s own­er­ship in­ter­est in Cronos Group would be ap­prox­i­mately 55 per cent (cal­cu­lated on a non-di­luted ba­sis). Ad­di­tion­ally, the war­rants will con­tain cer­tain anti-di­lu­tion pro­vi­sions.

Gov­er­nance rights Pur­suant to an in­vestor rights agree­ment to be en­tered into, at closing, Al­tria will have the right to nom­i­nate four di­rec­tors, in­clud­ing one in­de­pen­dent di­rec­tor, to serve on the board of di­rec­tors of Cronos Group, which will be ex­panded from five to seven di­rec­tors in con­nec­tion with the trans­ac­tion. Al­tria’s ex­clu­sive cannabis partner

Un­der the in­vestor rights agree­ment, Al­tria has agreed to make Cronos Group its ex­clu­sive partner for pur­su­ing cannabis op­por­tu­ni­ties through­out the world (sub­ject to cer­tain lim­ited ex­cep­tions.

At closing, the par­ties are also ex­pected to en­ter into com­mer­cial sup­port agree­ments un­der which Al­tria will pro­vide ser­vices

re­lat­ing to mar­ket­ing and brand man­age­ment, gov­ern­ment af­fairs, reg­u­la­tory af­fairs, and re­search and de­vel­op­ment. Closing and ap­provals The trans­ac­tion is ex­pected to close in the first half of 2019, sub­ject to cer­tain cus­tom­ary closing con­di­tions in­clud­ing the re­ceipt of ap­proval from the TSX, and re­ceipt of reg­u­la­tory ap­proval pur­suant to the In­vest­ment Canada Act. In ad­di­tion, un­der ap­pli­ca­ble TSX rules, the trans­ac­tion will re­quire ap­proval by at least the ma­jor­ity of the votes cast by share­hold­ers present at a spe­cial meet­ing of share­hold­ers as the trans­ac­tion is ex­pected to ma­te­ri­ally af­fect control of Cronos Group.

We seek Safe Har­bor.

Mike Caswell con­densed this news re­lease ([email protected]­

Ja­son Adler, Michael Coates, Alan Mark Friedman, Michael Goren­stein, James Daniel Rudyk

(CRON) Shares: 178,700,446 CS-ISntsri­ipd-e1-12

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