Altria investing $2.4B in Canadian cannabis producer Cronos

By Harry Brumpton and Uday Sampath Kumar

By Harry Brumpton and Uday Sampath Kumar

The agreement also includes a warrant that, if exercised, could see Altria's ownership rise to 55 per cent for another $1.4-billion.

"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.

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.

"This is showing that the entire industry is viable and a huge growth opportunity".

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.

Altria's entry could also help restore confidence in Canada's nascent cannabis sector. Its stock had fallen 24 percent this year through Thursday's close - illustrating how investors had become pessimistic about the company's future amid rising regulations and taxes on tobacco. 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.

- There are a handful of companies listed on the Toronto Stock Exchange devoted exclusively to cannabis, either for medicinal or recreational use, or both: Canopy Growth Corp., Aurora Cannabis Inc. and Cronos Group Inc.

Cronos's Gorenstein said his company and Altria agree that developing brands and intellectual property is more valuable than growing plants and should be the focus going forward.

The Cronos investment follows other deals in this space. Altria declined an interview request and didn't speak on a conference call Friday held by Cronos.

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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. It has entered into joint ventures to boost its presence and capacity in Canada and overseas, including in Israel and Australia.

Altria shares rose as much as 3.2 percent to $56.14 on Friday. "It's worth noting that Altria does not grow their own tobacco. We think that that model of growing your own plants is very hard to scale and execute well".

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.

Reuters had first reported on the deal negotiations on Monday. Bank of America Merrill Lynch financed Constellation's deal with Canopy. Canada's top lenders, who have largely refused to serve clients in the cannabis sector for years, are now getting shut out of the sector's biggest transactions.

Prior to Friday's announcement, Cronos had confirmed reports that it was in talks with Altria.

Many alcoholic beverage, tobacco and other consumer products companies may want to bet on cannabis.

- In the US, marijuana still is illegal at the federal level, but 10 states and the District of Columbia have legalized recreational marijuana for adults.

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