Big Tobacco invests heavily in Canadian cannabis player
Cronos Group arranges $2.4B placement with Altria
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]watch.com).
Jason Adler, Michael Coates, Alan Mark Friedman, Michael Gorenstein, James Daniel Rudyk
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