Cannabis allure proves irresistible for Marlboro maker, tobacco giant

Altria invests in pot producer, setting up for majority control

Altria Group, the U.S. maker of Marlboros, made a $1.8 billion 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 percent 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 percent, 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 on Friday. Its stock had fallen 24 percent this year through Thursday’s close — illustrating how investors had become pessimistic about the company’s future amid rising regulations and taxes on tobacco.

Cronos shares, meanwhile, surged as much as 33 percent to $13.95 in New York. Altria’s offer of C$16.25 a share represents a 16 percent premium from Thursday’s closing price. Peers in the marijuana sector also gained, with Aurora Cannabis rising as much as 11 percent, Aphria adding 14 percent, Canopy Growth Corp. rising 7.3 percent and Tilray gaining 4.8 percent.

The deal will expand Cronos’ 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.