Altria invests $2.4B for stake in cannabis producer Cronos
TORONTO — Tobacco giant Altria Group will invest $2.4 billion in Canadian cannabis producer Cronos group for a 45-per-cent ownership stake as the global market for legal pot continues to grow.
Virginia-based Altria, parent of the company that makes Marlboro cigarettes, can also invest up to a further $1.4 billion within four years that would increase its ownership stake in Torontobased Cronos to 55 per cent, under the arrangement.
“Altria brings scale, expertise and complimentary capabilities ... that we believe will enable us to expand the scope and enhance the scale of our company,” said Mike Gorenstein, chairman, president and chief executive officer of Cronos on a call with analysts on Friday.
As part of the agreement, Altria will have the right to nominate four directors to the Cronos board, which will be expanded to seven members from five.
“Investing in Cronos Group as our exclusive partner in the emerging global cannabis category represents an exciting new growth opportunity for Altria,” Howard Willard, Altria’s chairman and chief executive officer, said Friday in a statement.
“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.”
Cronos will remain a Canadian company, headquartered in Toronto, Gorenstein said.
Shares of Cronos surged as much as 33 per cent to $18.56 on the Toronto Stock Exchange from its $13.98 closing price on Thursday. It was trading at $17.15 by midday.
The company’s stock on the Nasdaq soared by as much as 40 per cent to $14.58 US from its previous close of $10.45 US, but was trading at $12.88 by midday.
Canada on Oct. 17 became the second country in the world to legalize pot for recreational use. Several U.S. states have legalized cannabis for medical or recreational use, but pot remains illegal under federal law.
However, the political climate south of the border has been warming up to cannabis. For example, legislation that would allow for the full legalization of industrial hemp in the U.S. and ease restrictions on the cannabis compound CBD is working its way through the U.S. legislative process.
During the U.S. midterm elections, Michigan became the latest state to approval the legalization or recreational cannabis and Utah and Missouri approved the drug for medical purposes.
Meanwhile, the number of countries that have legalized medical cannabis continues to grow, with South Korea among the latest to give the green light.
The Marlboro maker’s $2.4 billion bet on Cronos is by far the biggest move by Big Tobacco into pot, and bodes well for the overall cannabis sector, said Martin Landry, an analyst with GMP Securities.
“When you look at the commitment that Altria makes, they’re obviously looking at the sector for the next 10 to 20 years. And they’re seeing a ton of growth,” he said in an interview.
The deal is a “big endorsement” for Cronos and is “reassuring” for the industry, amid rising concerns that pot companies’ valuations may be too lofty, Landry added.
Many stocks in the volatile sector were up on Friday after the deal was announced. Pot producers Aurora Cannabis and Canopy Growth Corp’s shares in Toronto were up by roughly eight per cent and four per cent, respectively, at midday.
The value of publicly-traded Canadian cannabis companies had soared leading up to Oct. 17, when sales of cannabis became legal under rules and regulations established by Ottawa and the provinces.
Major pot stocks have generally pulled back from their highs in recent weeks amid reports of supply shortages and complications with the sales process under the new regime.
Altria’s investment marks the latest move by a U.S. company in an established industry to tap the burgeoning Canadian cannabis industry.
In August, alcohol giant Constellation Brands said it would invest an additional $5 billion in Canadian pot producer Canopy Growth Corp., increasing its stake to 38 per cent.
As well, U.S. tobacco leaf merchant Alliance One International said its subsidiary acquired a 75 per cent equity stake in Charlottetown-based Canada’s Island Garden in January.
Meanwhile, Molson Coors launched a joint venture called Truss with Quebec-based cannabis producer Hexo Corp.
Prior to Friday’s announcement, Cronos had confirmed it was in talks with Altria.
Altria has agreed to pay $16.25 per share to acquire 146.2 million shares of Cronos, which represents a 41.5 premium above the stock before it confirmed the companies’ preliminary discussions.
It will also acquire warrants that will allow Altria to buy more stock at $19 per share within four years.