(This story has been updated to include an interview with Cronos CEO Mike Gorenstein.)
Altria Group, one of the largest tobacco companies in North America, has agreed to invest 2.4 billion Canadian dollars ($1.8 billion) in Ontario-based cannabis producer Cronos Group – the most significant foray by Big Tobacco into the rapidly growing cannabis industry to date.
Altria also agreed to make Cronos its exclusive partner for international cannabis opportunities.
The entry of Altria – owner of Marlboro maker Philip Morris USA and an investor in alcohol giant Anheuser-Busch InBev – is another major milestone for the marijuana sector, coming on the heels of Constellation Brands’ bombshell investment in Canopy Growth in August.
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 Nov. 30, the last unaffected trading day before Cronos publicly disclosed discussions with Altria.
That will give Altria a 45% ownership interest in Cronos.
Altria also will receive warrants, which, if exercised, would increase its ownership to 55% and provide an additional CA$1.4 billion in proceeds for the integrated marijuana company.
The exclusive partnership will give Cronos additional financial resources, regulatory expertise and product development and commercialization capabilities to tap international cannabis opportunities, the company said in the announcement.
The transaction is expected to close in the first half of next year.
Gorenstein said the proceeds will enable Cronos to continue to grow business overseas and in Canada.
“We plan to use a lot of it this to open new markets and keep growing out, but our innovation hub is Peace Naturals in Canada, and that will continue,” he said.
Cronos plans to prioritize research and development, innovation and developing brands.
“In Canada, the focus seems to still be on capacity, but that is not what this is about,” Gorenstein added. “We don’t plan on using the capital to build greenhouses around the world. We want to work with local partners to create value in the supply chain.
“We’ll work with them on genetics, technical assistance, taking back the product and ultimately processing it, formulating it, branding it and distributing it,” he said.
Matt Bottomley, an analyst with Toronto-based investment firm Canaccord Genuity, wrote in a research note that he expects the news to drive valuations higher – particularly considering the sector’s recent pullback.
“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,” he said.
Altria will nominate four directors to an expanded seven-member Cronos board.
Altria had been assessing market opportunities in the cannabis industry since at least September.
The cigarette maker’s move follows modest investments in the cannabis sector in the past year by tobacco companies Imperial Brands and Pyxus International, formerly Alliance One International.
In February, Pyxus bought controlling stakes in two Canadian marijuana producers, Canada’s Island Garden and Goldleaf Pharm.
In June, British tobacco giant Imperial Brands was among investors taking a stake in Oxford Cannabinoid Technologies, a United Kingdom-based medical cannabis startup.
Matt Lamers can be reached at [email protected]
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