Tobacco giant Altria makes massive bet on cannabis

A Pack of Marlboro cigarettes

A Pack of Marlboro cigarettes

Tobacco giant Altria jumped into the cannabis business Friday morning, with a $1.8 billion deal for Canada's Cronos Group that raises doubts about the vertically integrated approach of most other pot companies. The agreement also includes a warrant that, if exercised, could see Altria's ownership rise to 55 per cent for another $1.4-billion.

Over this past year, Altria's stock (NYSE:MO) has fallen almost 5%, but its shares rose 25% Friday after this news was released and Cronos (NASDQ:CRON) rose 30%.

"Altria is the ideal partner for Cronos Group, providing the resources and expertise we need to meaningfully accelerate our strategic growth", said Cronos CEO Mike Gorenstein in a statement. The new relationship represents an "exciting new growth opportunity" and Cronos is backed by an "excellent management team".

Altria will acquire 146.2 million Cronos shares at a price of CA$16.25 per share, representing a 41.5% premium to the 10-day average price ending November 30, the last unaffected trading day before Cronos publicly disclosed discussions with Altria.

Cronos shares, meanwhile, surged as much as 33 percent to $13.95 in NY.

Canadian marijuana company, Canopy Growth, for example, has received a multibillion dollar investment from Corona owner Constellation Brands, CNN reported.

Cronos will remain a Canadian company, headquartered in Toronto, Gorenstein said. 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.

Coca-Cola (KO) was rumored to be considering an investment in Canadian cannabis company Aurora (ACB).

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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.

Many alcoholic beverage, tobacco and other consumer products companies may want to bet on cannabis. "And they're seeing a ton of growth", he said in an interview. Canada legalized recreational cannabis in October.

Investors seem to be betting that more deals could be coming.

That would put Altria's investment in the same league as the $4 billion spent this year by Constellation Brands to acquire shares of Canopy Growth Corp., another Canadian pot producer.

In February, Pyxus bought controlling stakes in two Canadian marijuana producers, Canada's Island Garden and Goldleaf Pharm.

Cronos confirmed last Friday that it was in talks with Altria after a Reuters report.

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 $200 million in the fourth quarter.

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