Opinion Editorial
by Eric Vengroff, Financial Analyst

Look out beaver bongs, the Marlboro man is moving north.  In what has turned out to be an exciting week in the world of pot-related acquisitions,  Cronos Group Inc. (NASDAQ: CRON) (TSX: CRON) announced that Altria Group, Inc. (NYSE: MO) (“Altria”) has agreed invest roughly C$2.4 billion for shares and warrants in Cronos. The resulting ownership of 45% interest plus the warrants worth 10% would give Altria a total of 55% of the company.  Howard Willard, Altria’s Chairman and Chief Executive Officer said the deal was exclusive, so presumably the door will be closed to future cannabis company acquisitions unless made through Cronos presumably.


Earlier this year, I heard a presentation from a cannabis industry expert that believed, that in the post-Canopy/Constellation cannabis universe there would be similar scale deals occurring.  He thought the logical contenders would come from the food and beverage, alcohol, Big Pharma, and Big Tobacco; but he sensed that Big Tobacco would be the least favorable and least appealing sources of capital for cannabis companies, largely due to the pre-existing stigma of tobacco being demonstrably unhealthy whereas cannabis is often presented as a ‘medicinal’ product.  It looks like C$2.4 billion is enough to make you put those worries aside for the moment.  It also strikes me as, particularly in the Canadian context, as inspired and making perfect sense.  Health Canada already considers cannabis in much the same way as tobacco.  The Canadian federal government along with many of the provinces employ similar prohibitions regarding the promotion, consumption and purchase of legal recreational cannabis as they do with tobacco.



Altria is no ordinary tobacco company, if there were ever such a thing.  Through its wholly-owned subsidiaries – Philip Morris USA Inc., and more, its equity interest in Anheuser-Busch InBev SA/NV (AB InBev), internationally recognized brands from Marlboro to Marlboro®, Copenhagen®, Skoal®, Chateau Ste. Michelle®, Stag’s Leap Wine Cellars™, and so on, its $10.2B 2017 earnings and  $108B market capitalization, this is a company that clearly knows how to make money from sin products – a feat that most cannabis companies have yet to achieve.  It was a behemoth when I studied the company as a case study in business school 40 years ago and it’s a behemoth now.  In a post tobacco-lawsuit world, it still earns $3.50/share.


Big MO does a lot more for Cronos than bring a Brinks truck full of cash.  The company’s massive global reach will plow the road for Cronos in international markets, along with the expertise to navigate the complicated regulations of various regimes around the world, especially with respect to cannabis and the intricacies of medicinal vs. recreational use.  With Altria’s extensive knowledge  Regulations regarding shipping, taxation, product registration and legal issues, accessing global markets should be made easier.


Altria’s product base includes nicotine delivery devices in a variety of possible ways, including cigarettes, dip, and vapes.  It’s vast accumulated knowledge and depth in the beverage industry may offer all kinds of possibilities.  There are no doubt plenty of folks running around in lab coats within this organization.


Under the terms of the agreement, Altria has agreed to acquire 146.2 million Shares at a price of C$16.25 per Share. Altria will also receive Warrants at closing entitling it to acquire up to an additional 10% ownership position in the Company exercisable from time to time, for a period of four years following closing for an exercise price of C$19.00 per Share, which represents an implied premium of 65.5% to the 10-day VWAP of the Shares on the TSX on November 30, 2018. Altria’s ownership interest in Cronos Group would be approximately 55% (calculated on a non-diluted basis). Additionally, the Warrants will contain certain anti-dilution provisions.


Altria will have the right to nominate four directors, including one independent director, to serve on the Board of Directors of Cronos Group, which will be expanded from five to seven directors in connection with the Transaction.  Cronos Group will be Altria’s exclusive partner in the cannabis space.


All things considered, this transaction represents another bold step by an old-line adult-use product seller, expanding into a new product segment that would otherwise threaten growth in their existing businesses – all their existing businesses.  Beat ‘em or join ‘em; Altria has chosen the latter.

The information and opinions presented here are that of the author and do not represent the thoughts and opinions of this website.  The analyst does not own or represent any of the companies listed in this article and receives no compensation from any party mentioned in this article. Readers are urged to do their own research and due diligence and should seek advice from an independent financial advisor before making any financial investment.

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