Altria Takes Major Stake in Cronos in Huge Bet on Pot

December 7, 2018

By Carlo Versano and Amanda Weston

Cigarette giant Altria said it would spend $1.8 billion for a 45 percent stake in Cronos ($CRON), the Canadian cannabis producer, signaling a massive bet that the legalization of marijuana will spread as cigarette smoking declines.

The announcement follows reports that Altria is also talking to Juul about a stake in the wildly-popular vape brand, which would be another hedge against Altria's ($MO) core tobacco business, which includes brands like Marlboro and Skoal.

Altria's equity stake would begin at 45 percent, but could be increased to a majority 55 percent stake over the next four years, according to the release.

Cronos CEO Mike Gorenstein said the support of the tobacco giant provides it with "resources and expertise" to scale its growth.

“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 and brands that resonate with our consumers," Gorenstein said.

In addition, Altria's decades of experience with changing regulatory landscapes would be critical for Cronos as cannabis regulations shift.

Matt Karnes, founder of GreenWave Advisors, told Cheddar Friday the deal is "an incremental positive for Cronos."

"It allows them to expand internationally," Karnes said.

"It provides them with a footprint and the expertise that Altria brings to the deal. In terms of what it does for Altria, it gets them into the cannabis business. I'm not a tobacco analyst ー but it's not a shock to know that tobacco sales have been steadily declining over the past several years."

For Altria ー which, through subsidiaries like Phillip Morris ($PM), made billions getting customers hooked on tobacco ー it’s hard to overstate the importance of this investment. The company best known for brands like Marlboro, Parliament, and Virginia Slims is now entering the world of Panama Red, Acapulco Gold, and Blue Dream. With cannabis now legal throughout Canada, and legal in some form in most of the United States, analysts are predicting Altria’s move will only lead to more cannabis investment by mainstream blue-chip companies.

"I think this type of big tobacco coming into cannabis has been widely anticipated for some time now," Karnes said. "It's just a matter of when. So I think it just adds more credibility to the sector as a whole, and now it may bring valuations down to a more realistic level."

Shares of Cronos jumped 22 percent Friday on the news, while competitors like Tilray ($TIL) and Canopy Growth ($CGC) saw bumps as well as investors speculated that they could be the next targets for takeovers or investments.

Karnes believes an announcement like this has been "widely-anticipated for some time."

"I don't think it's unreasonable to expect more of these types of announcements to occur," he said.