Marlboro maker places US$2.4 billion bet on marijuana

Darnell Taylor
December 8, 2018

The company announced a $1.8 billion (C$2.4 billion) investment in cannabis company Cronos Group (CRON).

It was also revealed on Friday, that they are also going to inject a further CAN $1.4bn (US $1bn / £830,000) for warrants, which would give the Altria a 55 percent ownership stake in the Toronto-based company.

"Altria is the ideal partner for Cronos Group, providing the resources and expertise we need to meaningfully accelerate our strategic growth", said Mike Gorenstein, Cronos Group's chairman, president and chief executive officer.

Altria is paying 16.25 Canadian dollars per share in cash, or about US$12-a 40% premium over Cronos stock's recent trading level on the Toronto exchange, where it dual-lists with the Nasdaq.

The deal will expand Cronos' board from five to seven seats, with Altria getting a total of four of them.

Cronos, meanwhile, grows and sells medical and recreational cannabis in Canada, operating two growing facilities in Ontario and one in British Columbia. Marijuana, while still illegal on the federal level in the USA, is now allowed in an increasing number of states, while Canada now represents a large laboratory for the nascent industry.

The deal is a "big endorsement" for Cronos and is "reassuring" for the industry, amid rising concerns that pot companies' valuations may be too lofty, Landry said. The decision by Altria to go ahead with an investment in Cronos shows that Altria is serious about investing in marijuana as a new growth area as sales of traditional cigarettes slow.

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Many stocks in the volatile sector were up on Friday after the deal was announced.

This week, Aphria Inc., one of the country's largest cannabis growers, was defending itself against accusations of striking deals to enrich insiders made in a widely read short-sellers' report.

The value of publicly-traded Canadian cannabis companies had soared leading up to October 17, when sales of cannabis became legal under rules and regulations established by Ottawa and the provinces. The move will help it tap into a customer base outside cigarette smokers, as cigarette smoking declines in the U.S.

In August, alcohol giant Constellation Brands said it would invest an additional $5 billion in Canadian pot producer Canopy Growth Corp., increasing its stake to 38 per cent.

For its initial investment, the tobacco giant will acquire a 45% ownership stake in Cronos.

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".

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