Altria to marry Canadian pot with big tobacco

Greenhouse facilities under construction in Ontario for Peace Naturals, a Cronos Group subsidiary. (PeaceNaturals.com)

Reuters — Marlboro cigarette maker Altria Group announced a $2.4 billion investment in Cronos Group on Friday, which could give it up to 55 per cent ownership of the Canadian cannabis producer.

The deal represents by far the biggest investment by a major tobacco conglomerate in a cannabis company. It comes after Canada legalized the recreational use of marijuana this year, and several other jurisdictions, including some states in the United States, follow suit.

With the Cronos investment, Altria will get a new opportunity to boost revenue as cigarette smoking continues to decline in the United States. Federal data from November showed cigarette smoking among U.S. adults reached an estimated 14 per cent in 2017, the lowest level ever.

“As a company that operates predominantly in the highly-regulated tobacco industry, we believe Altria has valuable regulatory and compliance experience that could end up being a key competitive advantage for Cronos, as it competes with other licensed producers for what seems to be a growing set of international opportunities,” Canaccord Genuity analysts wrote in a research note.

Altria will buy 146.2 million newly issued Cronos shares at $16.25 per share for a 45 per cent stake. The offer represents a 16 per cent premium to the TSX-traded stock’s Thursday close.

The deal also includes warrants to acquire an additional ownership interest in Cronos at a price of $19 per share over the next four years, which could raise Altria’s stake to 55 per cent.

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

The deal structure was driven by an appetite on Toronto-based Cronos’ part to entertain discussions with other parties, although it is not guaranteed that any future discussions will result in product partnerships or new deals, according to one person familiar with the matter.

“Altria’s experience is very wide-ranging — not just in tobacco, but in adult beverages in different categories and decades of experience in how to bring different products to market,” Cronos CEO Michael Gorenstein said on a call with analysts.

“That experience, we think, is going to be very important as we try to accelerate new product categories.”

Cronos’ Canadian production and marketing operations include fully-owned subsidiaries Peace Naturals, at Simcoe, Ont. and Original BC, based in British Columbia’s Okanagan Valley. Cronos also holds a 21.5 per cent stake in B.C.-based organic producer Whistler Medical Marijuana Co.

Altria’s Cronos investment follows other deals in this space.

In June, London-based tobacco company Imperial Brands took an undisclosed stake in closely held Oxford Cannabinoid. Constellation Brands announced a $3.8 billion investment in Canopy Growth in August, while Coca-Cola said in September it was watching the space for alliances that could potentially help it develop products containing cannabinoid oil.

E-cigarettes

Separately on Friday, Altria said it would discontinue some of its e-cigarette brands, including all of MarkTen and Green Smoke e-vaper products, based on their financial performance and will take a related pretax charge of US$200 million in the fourth quarter.

Altria has invested in e-cigarettes in recent years through its Nu Mark subsidiary, which sells devices such as the MarkTen e-cigarettes in convenience stores and tobacco shops. In 2014, Altria acquired e-cigarette startup GreenSmoke Inc. for US$110 million.

Altria’s products, however, have lost significant ground to e-cigarette maker Juul Labs over the last year, as have e-cigarette brands from other major tobacco companies.

Altria is also in talks to take a minority stake of between 20 and 40 per cent in Juul, sources told Reuters last month.

Reporting for Reuters by Harry Brumpton in New York and Uday Sampath in Bangalore. Includes files from Glacier FarmMedia Network staff.

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