Tobacco giant Altria makes massive bet on cannabis

Tobacco giant Altria makes massive bet on cannabis

The country has largely been celebrating ever since, but in an unexpected step one of the biggest cigarette firms in the world has announced that it is pumping an incredible CAN $3.8 billion (US $2.9bn / £2.2bn) into the cannabis market.

Altria Group Inc., the maker of Marlboro cigarettes, has struck a deal to buy a large stake in Cronos Group Inc., a cannabis grower in Toronto.

Altria can also invest up to a further $1.4 billion to increase its ownership stake in Cronos to 55 per cent, under the arrangement.

Over this past year, Altria's stock (NYSE:MO) has fallen almost 5%, but its shares rose 25% Friday after this news was released and Cronos (NASDQ:CRON) rose 30%. A wave of cannabis producers have set up shop in Canada, where recreational use was legalised earlier this year.

Coca-Cola (KO) was rumored to be considering an investment in Canadian cannabis company Aurora (ACB). Canadian pot stocks have been crushed in recent weeks after a lacklustre start to recreational sales amid reports of countrywide supply shortages. Federal data from November showed cigarette smoking among USA adults reached an estimated 14 per cent in 2017, the lowest level ever.

Cronos, meanwhile, grows and sells medical and recreational cannabis in Canada, operating two growing facilities in Ontario and one in British Columbia.

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. It said it was doing so because it doesn't "see a path to leadership with these particular products", as well as the regulatory burden it faces to bring them to market. "In fact, we think this partnership makes us collectively a more attractive partner" for other potential investors, Gorenstein said on a conference call Friday.

Coca Cola bottle and glass on picnic table
Coca Cola bottle and glass on picnic table

As part of the agreement, Altria will be able to nominate four members to Cronos Group's board of directors.

That would mean Altria's investment would be in the same league as the $4 billion spent earlier this year by Constellation Brands to acquire shares of Canopy Growth Corp., another Canadian pot producer.

Altria's investment in Cronos is by far the largest move by Big Tobacco into cannabis, said Martin Landry, an analyst with GMP Securities.

Cronos confirmed last Friday that it was in talks with Altria after a Reuters report.

Altria has agreed to pay $16.25 per share to acquire 146.2 million shares of Cronos. There is also a warrant giving Altria the right to purchase additional shares at $14.25 a share over the next four years.

Cronos plans to prioritize research and development, innovation and developing brands.

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