Marlboro cigarette maker Altria Group Inc made a big bet on the rapidly growing marijuana industry on Friday with a $2.4 billion investment in Canadian cannabis producer Cronos Group Inc. The move will help it tap into a customer base outside cigarette smokers, as cigarette smoking declines in the U.S.
Altria also will receive warrants, which, if exercised, would increase its ownership to 55% and provide an additional CA$1.4 billion in proceeds for the integrated marijuana company.
"Investing in Cronos Group as our exclusive partner in the emerging global cannabis category represents an exciting new growth opportunity for Altria", said Howard Willard, Altria's Chairman and Chief Executive Officer.
Altria has agreed to pay $16.25 per share to acquire 146.2 million shares of Cronos, which represents a 41.5 premium above the stock before it confirmed the companies' preliminary discussions.
As part of the agreement, Altria will be able to nominate four members to Cronos Group's board of directors.
"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 worldwide opportunities", Canaccord Genuity analysts wrote in a research note. The transaction is expected to close in the first half of 2019.
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"We believe cannabis is an excellent strategic fit for tobacco", Jefferies analyst Owen Bennett said in a research note earlier this week.
The Cronos investment follows other deals in this space.
Canadian marijuana company Canopy Growth (CGC) already has received a multibillion dollar investment from Corona owner Constellation Brands (STZ).
Gorenstein said that 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". Altria is paying 25 times forward sales, she said, and in her view, Altria is "buying their way out of a bind" after nearly two decades of volume decline for USA cigarettes, and a challenging 2018 for e-cigarettes.
This will bring the megabucks investment up to the same level as the CAN $4bn (US $3bn / £2.3bn) which Constellation Brands spent earlier this year when they bought out Canopy Growth Corp., a cannabis producer also based in Canada. In 2014, Altria acquired e-cigarette startup GreenSmoke Inc for $110 million.
Altria is also in talks to take a minority stake of between 20 per cent and 40 per cent in e-cigarette maker Juul Labs Inc, sources told Reuters last month.
Trump had nothing but praise for the two new Cabinet members who he announced on Friday that he would nominate for the Senate. Mike Pence's chief of staff Nick Ayers has reportedly been angling for the job and is seen as the leading candidate.
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Australian Prime Minister Scott Morrison leaves the House of Representatives after debate on amendments to the encryption laws. Australia's decision is the most serious attempt by any national parliament so far to rein in tech companies involuntarily.
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