Al­tria buys $1.8B stake in pot com­pany Cronos

The Atlanta Journal-Constitution - - BUSINESS - By Tif­fany Kary and Kris­tine Owram Bloomberg News

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.

AS­SO­CI­ATED PRESS 2015

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.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.