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Cigarette Maker Altria Gets into Pot Business With $1.8 Billion Cronos Stake

Dec. 7, 2018
The deal would give Altria a 45% stake in the Canadian cannabis producer.

Altria Group Inc., the maker of Marlboro cigarettes for the U.S. market, is pushing into the Canadian cannabis industry, marking the major tobacco company’s first foray into the nascent sector. Shares of cannabis peers gained on the news.

Altria agreed to acquire 146.2 million newly issued shares for C$16.25 each -- a 16% premium from yesterday’s close. That would give Altria a 45% stake in the Canadian cannabis producer. Altria will also get warrants that will give the option to increase its stake to 55%.

Key Insights

The deal with Cronos gives Altria a foothold in Canada, which in October became the first major economy to legalize marijuana for adult use on a federal level. Cronos, meanwhile, gets “product development and commercialization capabilities, and deep regulatory expertise,” the company said in a press release.

Altria also announced it would discontinue two of its next-generation tobacco products, MarkTen and Green Smoke e-vapor products, as well as its oral nicotine-containing products, and focus on “more compelling reduced-risk tobacco product opportunities.” The company will record a $200 million writedown.

The biggest companies have avoided investing in U.S. cannabis businesses, which are legal in a handful of states, because of the federal prohibition on the drug. That’s made Canada an attractive place for investors and businesses to push into the growing sector.

Altria has been grappling with the steady decline of tobacco smoking rates and sees potential to tap into a new segment of growth as marijuana moves into the mainstream. Chief Executive Howard Willard said the investment is “an exciting new growth opportunity for Altria.”

Digging Deeper

Altria already has a deal to sell Philip Morris’s “heat not burn” IQOS product in the U.S. if it gets regulatory approval, which would give it access to a different market than that of the traditional cigarette smoker.

“As one of the largest companies in the adult consumer products sector, Altria has decades of experience in regulatory, government affairs, compliance, product development and brand management that we expect to leverage, particularly as new markets for cannabis open around the world,” Cronos said in its press release.

Meanwhile, Altria is also said to be in talks to buy a stake in Juul, another fast-growing company threatening the traditional cigarette space. The possible expansions in more than one direction show it’s open to any number of approaches to resume growth.

Market Reaction

Investors cheered the news, sending the company’s shares up as much as 2.5% in early trading. Altria had declined 24% this year through Thursday’s close. Shares of cannabis peers rose. Cronos surged 36% to above $14 per share at 8:25 a.m. in pre-market trading in New York, trading to levels it hasn’t seen since September. Peers in the marijuana sector also gained, with Aurora Cannabis Inc. rising 8.3%, Aphria Inc. adding 8%, Canopy Growth Corp. rising 6% and Tilray Inc. gaining 5%.

By Tiffany Kary

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