Al­lure of cannabis proves ir­re­sistible for tobacco com­pany

Al­tria Group, the U.S. maker of Marl­boro, in­vests $1.8 bil­lion in Cana­dian pot busi­ness

Toronto Star - - SBJ - TIF­FANY KARY AND KRISTINE OWRAM BLOOMBERG With files from the Cana­dian Press

Al­tria Group Inc., the U.S. maker of Marl­boro, made a $1.8 bil­lion (U.S.) in­vest­ment in a Cana­dian pot com­pany Fri­day based on a sim­ple premise: cannabis is grow­ing fast, and cig­a­rettes are not.

Al­tria has agreed to take a 45 per cent stake in Toron­to­based mar­i­juana pro­ducer Cronos Group Inc., mark­ing a ma­jor tobacco com­pany’s first foray into cannabis. Al­tria’s stake will start at 45 per cent, with the op­tion to climb to ma­jor­ity control in the fu­ture. With U.S. smok­ing rates fall­ing fast, Rich­mond, Vir­ginia-based Al­tria is un­der pres­sure to find new av­enues to ex­pand revenue. Mar­i­juana, while still il­le­gal on the fed­eral level in the U.S., is now al­lowed in an in­creas­ing num­ber of states, while Canada now rep­re­sents a large lab­o­ra­tory for the nascent in­dus­try.

“We be­lieve cannabis is an ex­cel­lent strate­gic fit for tobacco,” Jef­feries an­a­lyst Owen Ben­nett said in a re­search note ear­lier this week.

It’s a log­i­cal fit, be­cause “big tobacco knows how to cul­ti­vate crop, knows how to deal with reg­u­la­tors, they are at the fore­front of va­por­iza­tion tech­nol­ogy and they also ar­guably have less rep­u­ta­tional risk than other fast-mov­ing con­sumer goods,” he said.

It’s clear Al­tria has re­assessed its com­pet­i­tive po­si­tion. It also an­nounced Fri­day that it will dis­con­tinue two of its next-gen­er­a­tion tobacco prod­ucts and its oral nico­tine-con­tain­ing ones to fo­cus on “more com­pelling re­duced-risk tobacco prod­uct op­por­tu­ni­ties.” The com­pany at­trib­uted this to reg­u­la­tory re­stric­tions and lack of fi­nan­cial prospects for those prod­ucts.

Al­tria shares rose as much as 3.2 per cent to $56.14 on Fri­day. Its stock had fallen 24 per cent this year through Thurs­day’s close — il­lus­trat­ing how in­vestors had be­come pes­simistic about the com­pany’s fu­ture amid ris­ing reg­u­la­tions and tax- es on tobacco. Cronos shares, mean­while, surged as much as 33 per cent to $13.95 in New York. Al­tria’s of­fer of $16.25 (Cana­dian) a share rep­re­sents a 16 per cent pre­mium from Thurs­day’s closing price. Peers in the mar­i­juana sec­tor also gained, with Aurora Cannabis Inc. ris­ing as much as 11 per cent, Aphria Inc. adding 14 per cent, Canopy Growth Corp. ris­ing 7.3 per cent and Til­ray Inc. gain­ing 4.8 per cent.

The deal will ex­pand Cronos’s board from five to seven seats, with Al­tria get­ting a to­tal of four of them.

Cowen an­a­lyst Vivien Azer said it’s not sur­pris­ing that Al­tria opted for a path­way to a ma­jor­ity control of Cronos. Al­tria is pay­ing 25 times for­ward sales, she said, and in her view, Al­tria is “buy­ing their way out of a bind” af­ter al­most two decades of vol­ume de­cline for U.S. cig­a­rettes, and a chal­leng­ing 2018 for e-cig­a­rettes.

Cronos CEO Mike Goren­stein said the part­ner­ship with Al­tria doesn’t limit the cannabis firm from en­gag­ing with other strate­gic partners.

“In fact, we think this part­ner­ship makes us col­lec­tively a more at­trac­tive partner” for other po­ten­tial in­vestors, Goren­stein said on a con­fer­ence call Fri­day. The most at­trac­tive piece of the part­ner­ship is Al­tria’s ex­pe­ri­ence deal­ing with reg­u­la­tory agen­cies, he said.

Al­tria cur­rently has been grap­pling with a Food and Drug Ad­min­is­tra­tion that’s in­tent on strength­en­ing re­stric­tions on some of the va­p­ing prod­ucts that have caught on with younger users.

Philip Morris In­ter­na­tional Inc., which was spun off from Al­tria and sells the Marl­boro brand in­ter­na­tion­ally, has been try­ing to get U.S. ap­proval for Al­tria to mar­ket its IQOS de­vice. Sep­a­rately, it has asked for reg­u­la­tory per­mis­sion to say the de­vice car­ries a lower health risk than reg­u­lar tobacco prod­ucts.

Goren­stein said his com­pany and Al­tria agree that de­vel­op­ing brands and in­tel­lec­tual prop­erty is more valu­able than grow­ing plants and should be the fo­cus go­ing for­ward.

“When we were strate­gi­cally plan­ning how we would en­ter cannabis years ago, one of the com­pa­nies that we looked at and had a lot of re­spect and ad­mi­ra­tion for was Al­tria,” he said.

“It’s worth not­ing that Al­tria does not grow their own tobacco. We think that model of grow­ing your own plants is very dif­fi­cult to scale and to ex­e­cute well. That was some­thing we’re very aligned with.”

GENE J. PUSKAR THE AS­SO­CI­ATED PRESS FILE PHOTO

With U.S. smok­ing rates fall­ing fast, Al­tria is un­der pres­sure to find new revenue streams.

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