Tobacco is going to pot.
Altria, the tobacco behemoth behind Marlboro, announced on Friday that it intends to invest $1.8 billion for a 45% stake in Cronos Group, a NASDAQ-listed Canadian marijuana cultivator. As part of the deal, Altria will be able to nominate four directors to Cronos’ expanded seven-member board.
Wall Street analysts reacted favorably to the news, with Canaccord Genuity saying the investment provided “overall legitimacy to the industry as a whole.”
The deal was announced after rumors emerged on Monday that Altria and Cronos were engaged in early talks. Both stocks were lifted by the news: On Friday, Cronos jumped over $3, or 21%, and Altria was up over $0.60, or 1%, following long declines amid lagging tobacco sales.
Having access to Altria’s deep pockets — and expertise in navigating the complicated regulations in the tobacco industry — could give Cronos a leg up over its competition as it looks to build out its international presence, the Canaccord analysts said.
Michael Gorenstein, Cronos Group’s CEO, said Altria was an “ideal partner” on a Friday morning call.
“The proceeds from Altria’s investment will enable us to more quickly expand our global infrastructure and distribution footprint, while also increasing investments in R&D [research and development] and brands that resonate with our consumers,” Gorenstein said.
The long-term winners in the cannabis industry ‘are not yet clear’
Piper Jaffray analysts said in a note that the deal could “position both companies for better growth,” giving Cronos “financial and regulatory resources” while providing Altria with access to the rapidly growing cannabis industry.
“With a rapidly evolving cannabis landscape in which long-term winners are not yet clear, Altria’s $1.8B stake seems more reasonable to us than a comparable recent deal activity that has exceeded twice that amount,” the analysts said. In August, Constellation Brands — the beer maker behind brands like Corona and Modelo — sank $4 billion into a 38% stake of Canopy Growth, a Canadian licensed producer.
Piper Jaffray’s analysts added that while Altria has room to pursue more deals, depending on the size, the Cronos investment suggests that the tobacco company won’t pursue a similar deal with vaporizer company Juul, as has been previously reported.
Vivien Azer, an analyst at Cowen, said the deal was proof that cannabis could offer “incremental growth” for tobacco companies like Altria as they face severe headwinds from increased regulation and slowing tobacco sales.
Altria and Constellation Brands aren’t the only major corporations to push into cannabis.
Molson Coors entered a joint venture with HEXO to produce cannabis-infused beverages for the Canadian market in August.
Coca-Cola is also reportedly eyeing a deal with Aurora Cannabis to produce beverages infused with cannabidiol, or CBD, for the Canadian market, though neither company has confirmed a deal is in the works.
The cannabis sector as a whole this week has seen a pullback after short sellers targeted Aphria, one of the largest Canadian cannabis cultivators by market cap. News of the tie-up between Altria and Cronos lifted the North American Marijuana Index on Friday.