Marlboro maker places $2.4B bet on Canadian marijuana company
08 December, 2018, 16:59 | Author: Brooke Harris
Altria's huge investment lit up shares of cannabis companies that have begun to set up shop in Canada, where recreational use was legalized this year.
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.
"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. Constellation Brands Inc., maker of alcoholic beverages, has invested more than $5-billion for control of Canopy Growth Corp., while Molson Coors Brewing Co.is looking to create cannabis-infused beverages through a joint venture with Quebec's Hexo Corp.
Coca-Cola (KO) was rumored to be considering an investment in Canadian cannabis company Aurora (ACB).
"We believe an investment of this magnitude provides overall legitimacy to the industry as a whole and should represent a positive catalyst for the sector, with the news likely to drive valuations higher", said Canaccord Genuity analyst Matt Bottomley, who has a 12-month price target of $9 on Cronos's stock and a "hold" rating. 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.
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". It also announced Friday that it will discontinue two of its next-generation tobacco products and its oral nicotine-containing ones to focus on "more compelling reduced-risk tobacco product opportunities".
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Altria shares rose as much as 3.2 percent to $56.14 on Friday. "I think it's worth noting that Altria doesn't grow their own tobacco".
Altria will nominate four directors to an expanded seven-member Cronos board.
Canada voted earlier this year to legalise weed.
Cronos and other cannabis stocks have been thrust into the spotlight in the past few months following the legalization of recreational marijuana in Canada in October, as well as legalized recreational and medical pot in several USA states last month.
Prior to Friday's announcement, Cronos had confirmed reports that it was in talks with Altria. Left, making the big Canadian producers "more valuable for that reason".
Regardless of other possible reasons, "it is mainly indicative of worries about how long growth in the US can remain so strong". This has spooked some people, because an inversion in the yield curve is sometimes regarded as the harbinger of a recession.
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