Wednesday, 19 December, 2018

Legal cannabis industry: Altria, Molson-Coors among companies exploring market

Big Tobacco Company Altria Takes Major Stake in Canadian Cannabis Firm Cronos Group Legal cannabis industry: Altria, Molson-Coors among companies exploring market
Nellie Chapman | 08 December, 2018, 17:00

Cronos's stock closed 22 per cent higher at $17.06 in Toronto, while shares of Altria fell 0.4 per cent.

Tobacco giant Altria (MO) is jumping on the cannabis bandwagon.

The first Canadian cannabis grower to list its shares on a USA stock market, Cronos said it plans to spend the money on product innovation, noting Altria's expertise in device technology and automation, and fuel Cronos's expansion into new countries amid a global shift toward loosening restrictions on the drug. The investment comes with a $1.9 billion warrant that will give Altria a 55 per cent stake in the company that can be executed over the next four years. 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.

The Denver-based brewing company said earlier this year that its Canadian unit would partner with the Hydropothecary Corporation "to pursue opportunities to develop non-alcoholic, cannabis-infused beverages for the Canadian market following legalization". Cronos now finds itself among a small pool of well-capitalized cannabis companies that can expand its offerings more effectively in Canada, internationally and, once it becomes federally legal, the United States.

As part of the agreement, Altria will have the right to nominate four directors to the Cronos board, which will be expanded to seven members from five.

The transaction is expected to finalize within the first half of 2019.

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

Cowen analyst Vivien Azer said it's not surprising that Altria opted for a pathway to a majority control of Cronos. Constellation Brands Inc announced a $3.8-billion investment in Canopy Growth Corp in August, while Coca-Cola Co said in September it was watching the space for alliances that could potentially help it develop products containing cannabinoid oil.

As well, US 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.

Prior to Friday's announcement, Cronos had confirmed reports that it was in talks with Altria.

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.

Cronos said it will use the capital to accelerate its global growth and expansion, as well as research and development. The most attractive piece of the partnership is Altria's experience dealing with regulatory agencies, he said.

Separately Altria also 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.