Al­tria buys $1.8B stake in Canada pot pro­ducer

The Sun News - - Business - BY TIF­FANY KARY AND KRISTINE OWRAM

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 si­mul­ta­ne­ously 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 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 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.

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 com­pli­ment the cannabis busi­ness, she said.

Al­tria spokesman Steven Cal­la­han de­clined to com­ment be­yond the com­pany’s press re­lease.

Al­tria shares rose as much as 3.2 per­cent to $56.14 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

‘‘ WE BE­LIEVE CANNABIS IS AN EX­CEL­LENT STRATE­GIC FIT FOR TOBACCO. (IT’S A LOG­I­CAL FIT BE­CAUSE) BIG TOBACCO KNOWS HOW TO CUL­TI­VATE CROP, KNOWS HOW TO DEAL WITH REG­U­LA­TORS . . . . Owen Ben­nett, an an­a­lyst for Jef­feries said in a re­search note

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 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 Inc. ris­ing as much as 11 per­cent, Aphria Inc. adding 19 per­cent, Canopy Growth Corp. ris­ing 7.3 per­cent and Til­ray Inc. gain­ing 4.8 per­cent.

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 eci­garettes.

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 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., de­clined to com­ment on the deal, but said it doesn’t change any­thing with re­spect to its plan to use prod­ucts like its smoke­free IQOS de­vice to re­place cig­a­rettes.

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

Cronos’s 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.

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