Altria buys $1.8B stake in pot company Cronos
Altria Group Inc., 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 Toronto-based marijuana producer Cronos Group Inc., marking a major tobacco company’s first foray into cannabis. It has the option to take majority control in the future.
The tobacco giant also said it will kill two of its next-generation products, fueling talk that a potential deal with Juul Labs Inc. could come soon.
With U.S. smoking rates falling fast, Richmond, Va.-based Altria is under pressure to find new avenues to expand. Marijuana is now allowed in an increasing number of states but is still illegal on the federal level in the U.S. That makes Canada, which legalized recreational use in October, a large laboratory for the nascent industry.
“We believe cannabis is an excellent strategic fit for tobacco,” Jefferies analyst Owen Bennett said 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.
This suggests “an announcement to acquire a stake in Juul could come very soon,” Wells Fargo analyst
Bonnie Herzog said in a Friday research note. Juul could complement the cannabis business, she said.
Altria spokesman Steven Callahan declined to comment beyond the company’s press release.
Altria shares declined 0.4 percent to $54.18 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.
The company isn’t likely to rush into exercising the warrants that could bump its stake up to 55 percent, but it’s possible that Cronos will eventually become part of the tobacco giant, said Bloomberg Intelligence analyst Kenneth Shea.
“It looks like an understanding that they would become one and the same,” Shea said, noting that Altria will also have four of seven board seats.
Altria got a good deal, particularly as Cronos is one of a dwindling number of licensed cannabis producers that haven’t already established an exclusive relationship with a consumer products company, he said.
Cronos shares, meanwhile, surged 21.7 percent to $12.17 in New York. .
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.
Cowen analyst Vivien Azer said Altria is “buying their way out of a bind” after almost two decades of volume decline for U.S. cigarettes.