Altria-Cronos Deal Isn't A Surprise, Says Top Analyst, And Cannabis Pros Agree
This morning, several media outlets reported that Marlboro cigarettes producer Altria will invest $1.8 billion in Canadian cannabis producer Cronos Group Inc., thus acquiring a 45% stake in the company.
On the heels of Canada's legalizing marijuana on October 17 and, before that, U.S. beer manufacturer Constellation Brands' $4 billion investment in Canopy Growth, another Canadian cannabis company—and let's not forget the rumors in September that Coca-Cola was in talks with Canadian marijuana grower Aurora Cannabis to develop CBD-infused drinks—the Altria/Cronos news shouldn't come as a shock to industry observers. With the Canadian market offering a legally accessible foothold for companies to dip their toes into a booming but still fragmented industry, this latest development is to be expected.
A big reason for this has been the languishing tobacco market, which has fallen considerably in the U.S. According to a recent report by the Centers for Disease Control and Prevention, smoking in the U.S. hit an all-time low in 2017, with an approximate 14% use among adults. That might be good news for the health of Americans but it's bad news for big tobacco companies like Altria, whose stock, according to Reuters in the same article where it reported on the talks with Cronos, sank “by more than 20% over the year.” Small wonder Altria is turning to other areas to boost its declining market share and revenues, such as e-cigarettes, as evidenced by the company being in talks to acquire a minority stake in Juul Labs—and now cannabis.
For Cowen’s Vivien Azer, the first senior Wall Street analyst to cover the nascent cannabis industry, Altria’s interest in cannabis was no big surprise. As she stated in a memo written before the Altria/Cronos transaction was made official, “we have asserted since 2016 that cannabis would be a synergistic incremental growth driver for the tobacco industry.” She further estimated that “exposure to the cannabis sector (with a roughly 20% share of the market) could close to double total tobacco revenue growth.”
Of course, cannabis professionals greet the news with a mix of excitement and anticipation. Joseph Lusardi, CEO of Curaleaf, a multistate cannabis operator, calls the news "a major vote of confidence in the cannabis industry." But like other U.S. cannabis professionals, Lusardi does express frustration with the country's continuing prohibition: “U.S. corporations are itching to invest in the booming, billion-dollar cannabis industry, but they have to take their money to other countries, like Canada, in order to invest. It’s high time that the federal government eased restrictions here, so that U.S. corporations can invest in the U.S. cannabis industry, creating jobs and business opportunities.”
Michael Gruber, a managing partner at Salveo Capital, a cannabis-focused investment firm, said the Altria/Cronos deal could open the floodgates for similar deals, particularly as the U.S. market inches toward federal legalization.
“Altria’s interest in Cronos is likely to be only one of such deals that we will see,” he mused, offering his thoughts right before the news became official. “With increasing adult-use legalization, tobacco and alcohol companies will be jockeying to get key position strongholds with leading established cannabis players that will enable them to scale quickly into this market. Once Altria is involved, others will not want to be left out, even if it is just an announcement of their exploration of their involvement.”
Canada’s legal market provides the “easiest point of entry” for the big companies, continued Gruber, “but there is also likely to be some partnerships through joint ventures, research collaborations and other minority investments in the U.S. even prior to federal legalization to allow for education building and strategic planning for how these companies will make their more aggressive bets upon U.S. federal legalization.”
It will be fascinating to see in six months to a year how all shakes out.
— Iris Dorbian Forbes Contributor