Marlboro maker places $1.8 billion bet on marijuana

Cronos Group confirmed is in business with Marlboro maker Altria

Cronos Group confirmed is in business with Marlboro maker Altria

Altria Group Inc., the USA maker of Marlboros, made a $1.8 billion investment in a Canadian pot company Friday based on a simple premise: Cannabis is growing fast, and cigarettes are not.

The transaction gives Altria a 45% interest in Cronos, which operates in both the medical and recreational marijuana markets.

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.

Marijuana, while still illegal on the federal level in the U.S., is allowed in an increasing number of states.

The Marlboro maker's $2.4 billion bet on Cronos is by far the largest move by Big Tobacco into cannabis, and bodes well for the overall sector, said Martin Landry, an analyst with GMP Securities. It said it was doing so because it doesn't "see a path to leadership with these particular products", as well as the regulatory burden it faces to bring them to market.

It's clear Altria has reassessed its competitive position.

Cronos plans to focus on cannabis genetics, innovation and branding, while contracting with farmers to grow the product and working with retailers. The stock closed at $17.06, up 22 per cent.

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

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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. Canopy Growth (CGC) was up 2.6%.

The deal grants Altria the option to acquire a controlling stake in Cronos at CAD $19 per share and to nominate four executives to Cronos Group's board of directors.

The cigarette giant has invested nearly $4m into the Canadian firm.

Cronos first murmured about Altria's potential takeover this week.

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

Altria now has been grappling with a Food and Drug Administration that's intent on strengthening restrictions on some of the vaping products that have caught on with younger users.

"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.

FOX Business breaks down other companies that have eyed investments in the cannabis industry below. "I think it's worth noting that Altria doesn't grow their own tobacco". We think that model of growing your own plants is very hard to scale and to execute well.

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