Al­tria in­vests $2.4B for stake in cannabis pro­ducer Cronos

The Welland Tribune - - Business - ARMINA LIGAYA

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.

RICHARD VO­GEL/AS­SO­CI­ATED PRESS RICHARD VO­GEL/AS­SO­CI­ATED PRESS

Al­tria said it would in­vest $1.8 bil­lion for a 45% stake in Cana­dian cannabis com­pany Cronos Group.

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