Published: Sat, December 08, 2018
Money | By Ralph Mccoy

Maker of Marlboro cigarettes turning to pot

Maker of Marlboro cigarettes turning to pot

Altria hopes pot is the key to help it grow beyond its stagnant cigarette business. The agreement also includes a warrant that, if exercised, could see Altria's ownership rise to 55 per cent for another $1.4-billion.

The deal is expected to close in the first half of 2019.

"As a company that operates predominantly in the highly-regulated tobacco industry, we believe Altria has valuable regulatory and compliance experience that could end up being a key competitive advantage for Cronos, as it competes with other licensed producers for what seems to be a growing set of global opportunities", Canaccord Genuity analysts wrote in a research note.

Altria's stock has fallen almost 25% this year and the company is expected to report revenue growth of only about 1% this year and in 2019.

Altria's shares increased two percent in early Friday trading while Cronos' shares soared to more than 30 percent.

"The proceeds from Altria's investment will enable us to more quickly expand our global infrastructure and distribution footprint, while also increasing investments in (research and development) and brands that resonate with our consumers", he continued. Marijuana, while still illegal on the federal level in the USA, is now allowed in an increasing number of states, while Canada now represents a large laboratory for the nascent industry.

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The value of publicly-traded Canadian cannabis companies had soared leading up to October 17, when sales of cannabis became legal under rules and regulations established by Ottawa and the provinces.

Canadian marijuana company Canopy Growth (CGC) already has received a multibillion dollar investment from Corona owner Constellation Brands (STZ). The company's shares have fallen as low as $3.40 since it announced it revised the terms of a bought deal last month to $75 million from a previously announced amount of $120 million. Co-founders Adam Bierman and Andrew Modlin purchased about $1.3 million worth of shares each on the open market on Thursday, the company said in a statement.

Coke's archrival Pepsi (PEP) hasn't completely ruled out a move into cannabis.

"Altria's experience is very wide-ranging - not just in tobacco, but in adult beverages in different categories and decades of experience in how to bring different products to market", Cronos chief executive Michael Gorenstein said on call with analysts.

The Canadian subsidiary of Molson Coors (TAP) has a joint venture with The Hydropothecary Corporation to produce cannabis-infused drinks for the Canadian market. And a beer brand owned by Heineken, Lagunitas, is selling a cannabis-infused sparkling water brand in California.

Altria's bet on Cronos could also prompt more similar deals in the sector, he added.

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