Maker of Marlboro cigarettes turning to pot

Cornelia Mascio
Dicembre 8, 2018

Tobacco giant Altria jumped into the cannabis business Friday morning, with a $1.8 billion deal for Canada's Cronos Group that raises doubts about the vertically integrated approach of most other pot companies.

Marlboro maker Altria Group Inc.is taking a 45 per cent stake in Cronos Group, the Canadian medical and recreational marijuana provider said Friday.

The Altria-Cronos deal is "encouraging" given the broad potential uses for cannabis such as in pharmaceuticals and health and wellness products, she said in a note to clients.

"Altria brings scale, expertise and complementary capabilities. that we believe will enable us to expand the scope and enhance the scale of our company", Mike Gorenstein, chairman, president and chief executive officer of Cronos, said on a call with analysts Friday.

Shares of Altria (MO) rose 2% in early trading Friday while Cronos (CRON) soared more than 30%.

After the deal is closed, Altria will have the right to nominate four directors, including one independent, to the Cronos board.

As well, the number of countries that have legalized medical cannabis continues to grow, with South Korea among the latest to give the green light. If exercised in full, Altria would own 55% of the company. 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. Marijuana, while still illegal on the federal level in the US, is now allowed in an increasing number of states, while Canada now represents a large laboratory for the nascent industry.

The cigarette maker's move follows modest investments in the cannabis sector in the past year by tobacco companies Imperial Brands and Pyxus International, formerly Alliance One International.

"We believe an investment of this magnitude provides overall legitimacy to the industry as a whole and should represent a positive catalyst for the sector", he said. It is the Virginia-based company's first foray into cannabis.

Short-seller Andrew Left of Citron Research, who has been a critic of Cronos and was betting against the stock going into Friday, said that this deal shows why Canadian growers trade at a premium to US -based cannabis companies.

The parent company of Corona beer acquired a $4 billion stake in Canada-based pot producer Canopy Growth last August, upping its ownership of the company to 38 percent from about 10 percent.

As well, USA tobacco leaf merchant Alliance One International said its subsidiary acquired a 75 per cent equity stake in Charlottetown-based Canada's Island Garden in January.

Cronos said it will use the capital to accelerate its global growth and expansion, as well as research and development.

In February, Pyxus bought controlling stakes in two Canadian marijuana producers, Canada's Island Garden and Goldleaf Pharm.

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