Al­tria buys stake in cannabis pro­ducer Cronos for $2.4-bil­lion

The Globe and Mail (BC Edition) - - BUSINESS - CHRISTINA PEL­LE­GRINI CANNABIS I NDUSTRY RE­PORTER

Big tobacco, meet Cana­dian cannabis.

Al­tria Group Inc ., the maker of Marl­boro cig­a­rettes, has struck ade alto buy a largest akei nC ron os Group Inc., a cannabis grower in Toronto.

Rich­mond, Va.-based Al­tria said Fri­day in a me­dia re­lease that it agreed to pay $2.4-bil­lion to ac­quire a 45-per-cent stake in Cronos. The agree­ment also in­cludes a war­rant that, if ex­er­cised, could see Al­tria’s own­er­ship rise to 55 per cent for an­other $1.4-bil­lion.

The first Cana­dian cannabis grower to list its shares on a U.S. stock mar­ket, Cronos said it plans to spend the money on prod­uct in­no­va­tion, not­ing Al­tria’s ex­per­tise in de­vice tech­nol­ogy and au­to­ma­tion, and fuel Cronos’s ex­pan­sion into new coun­tries amid a global shift to­ward loos­en­ing re­stric­tions on the drug.

“This is a huge val­i­da­tion of the in­dus­try and our model,” Mike Goren­stein, chief ex­ec­u­tive at Cronos, said by phone. “This is just an­other stamp of ap­proval that there is a huge op­por­tu­nity in cannabis and that it is a le­git­i­mate in­dus­try.”

The deal marks the en­try of an­other con­sumer­goods gi­ant into Canada’s le­gal cannabis in­dus­try. Con­stel­la­tion Brands Inc., maker of al­co­holic bev­er­ages, has in­vested more than $5-bil­lion for control of Canopy Growth Corp., while Mol­son Coors Brew­ing Co. is look­ing to cre­ate cannabis-in­fused bev­er­ages through a joint ven­ture with Que­bec’s Hexo Corp.

Al­tria’s en­try could also help re­store con­fi­dence in Canada’s nascent cannabis sec­tor. Cana­dian pot stocks have been crushed in re­cent weeks af­ter a lack­lus­tre start to recre­ational sales amid re­ports of coun­try­wide sup­ply short­ages. This week, Aphria Inc., one of the coun­try’s largest cannabis grow­ers, was de­fend­ing it­self against ac­cu­sa­tions of strik­ing deals to en­rich in­sid­ers made in a widely read short­sellers’ re­port. In­vestors, mean­while, have been pour­ing money into cannabis com­pa­nies that op­er­ate in mul­ti­ple U.S. states, piv­ot­ing away from Canada.

Cronos’s stock closed 22 per cent higher at $17.06 in Toronto, while shares of Al­tria fell 0.4 per cent.

“We be­lieve an in­vest­ment of this mag­ni­tude pro­vides over­all le­git­i­macy to the in­dus­try as a whole and should rep­re­sent a pos­i­tive cat­a­lyst for the sec­tor, with the news likely to drive val­u­a­tions higher,” said Canac­cord Ge­nu­ity an­a­lyst Matt Bot­tom­ley, who has a 12-month price tar­get of $9 on Cronos’s stock and a “hold” rat­ing.

Al­tria had been in talks with cannabis com­pa­nies for months, as its core cig­a­rette busi­ness con­tin­ues to shrink.

It also weighed mak­ing in­vest­ments in other grow­ers, such as Aphria and Can­nTrust Hold­ings Inc., ac­cord­ing to sources fa­mil­iar with the mat­ter who were granted anonymity be­cause the talks were pri­vate. Al­tria de­clined an in­ter­view re­quest and didn’t speak on a con­fer­ence call on Fri­day held by Cronos.

In a sep­a­rate news re­lease on Fri­day, Al­tria said it is dis­con­tin­u­ing its ex­ist­ing e-cig­a­rette brands and will take a US$200mil­lion charge on these as­sets in its next quar­ter.

It said it was do­ing so be­cause it doesn’t “see a path to lead­er­ship with these par­tic­u­lar prod­ucts,” as well as the reg­u­la­tory bur­den it faces to bring them to mar­ket. Al­tria is in talks to ac­quire a stake in e-cig­a­rette startup Juul Labs Inc., ac­cord­ing to re­ports by U.S. me­dia out­lets.

Cronos, mean­while, grows and sells med­i­cal and recre­ational cannabis in Canada, op­er­at­ing two grow­ing fa­cil­i­ties in On­tario and one in Bri­tish Columbia. It has en­tered into joint ven­tures to boost its pres­ence and ca­pac­ity in Canada and abroad, in­clud­ing in Is­rael and Aus­tralia.

But Cronos is not among Can- ada’s largest cannabis pro­duc­ers – it gen­er­ated just $3.8-mil­lion in revenue in its most re­cent quar­ter.

Cronos plans to fo­cus on cannabis ge­net­ics, in­no­va­tion and brand­ing, while con­tract­ing with farm­ers to grow the prod­uct and work­ing with re­tail­ers. Al­tria shares that vi­sion, Mr. Goren­stein said.

Cronos has part­nered with Bos­ton biotech firm Ginkgo Bioworks Inc. to ge­net­i­cally engi­neer the ac­tive com­pounds of cannabis.

“A lot of peo­ple talk about how im­por­tant ca­pac­ity is and grow­ing in cannabis,” Mr. Goren­stein added Fri­day on the con­fer­ence call. “I think it’s worth not­ing that Al­tria doesn’t grow their own tobacco. We think that that model of grow­ing your own plants is very dif­fi­cult to scale and ex­e­cute well.”

Al­tria will nom­i­nate four di-

I think it’s worth not­ing that Al­tria doesn’t grow their own tobacco. We think that that model of grow­ing your own plants is very dif­fi­cult to scale and ex­e­cute well. MIKE GOREN­STEIN CHIEF EX­EC­U­TIVE AT CRONOS

rec­tors to Cronos’s board, which will in­crease to seven di­rec­tors from five. The deal is ex­pected to close in the first half of 2019. JPMor­gan Chase Bank NA, a sub­sidiary of JPMor­gan Chase & Co., is pro­vid­ing fi­nanc­ing to Al­tria. Bank of Amer­ica Mer­rill Lynch fi­nanced Con­stel­la­tion’s deal with Canopy. There weren’t any Cana­dian-head­quar­tered ad­vis­ers in­volved in ei­ther deal. Canada’s top lenders, who have largely re­fused to serve clients in the cannabis sec­tor for years, are now get­ting shut out of the sec­tor’s big­gest trans­ac­tions.

Cronos con­firmed last Fri­day that it was in talks with Al­tria af­ter a Reuters re­port.

Short-seller An­drew Left of Citron Re­search, who has been a critic of Cronos and was bet­ting against the stock go­ing into Fri­day, said that this deal shows why Cana­dian grow­ers trade at a pre­mium to U.S.-based cannabis com­pa­nies.

“I think it shows that the U.S. play­ers – Al­tria and Con­stel­la­tion – will not buy into a U.S. cannabis com­pany un­til it be­comes fed­er­ally le­gal in the U.S.,” said Mr. Left, mak­ing the big Cana­dian pro­duc­ers “more valu­able for that rea­son. This puts a bid un­der the mar­ket for the next year.”

TI­JANA MARTIN/THE CANA­DIAN PRESS

A cannabis plant ap­proaches ma­tu­rity at a li­censed grow­ing fa­cil­ity in Fen­wick, Ont. Cronos plans to use its cash in­fu­sion from Al­tria to fo­cus on ge­net­ics, in­no­va­tion and brand­ing.

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