Altria Makes $1.8B Investment in Canadian Cannabis Market

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Altria Makes $1.8B Investment in Canadian Cannabis Market

12/10/2018

RICHMOND, Va. — Altria Group Inc. is heading north for its next investment: taking a minority stake in Canadian cannabis company Cronos Group Inc. 

The tobacco company reached an agreement to acquire newly issued shares in Toronto-based Cronos Group Inc. The transaction represents a 45-percent equity stake in Cronos Group for an aggregate investment by Altria of approximately $1.8 billion.

In Canadian dollars, the deal comes in at $16.25 per share, for an aggregate investment of approximately $2.4 billion.

As part of the agreement, at closing, Altria will have the right to nominate four directors, including one independent director, to serve on Cronos Group's board of directors. As a result, the board will expand from five to seven directors.

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

"Investing in Cronos Group as our exclusive partner in the emerging global cannabis category represents an exciting new growth opportunity for Altria," said Howard Willard, Altria's chairman and CEO. "We believe that Cronos Group's excellent management team has built capabilities necessary to compete globally, and we look forward to helping Cronos Group realize its significant growth potential."

According to Altria, the pact includes a warrant to acquire an additional ownership interest in Cronos Group at a price of CAD $19 per share exercisable over four years from the closing date. If exercised in full, the warrant would increase Altria's ownership in Cronos Group by 10 percent to approximately 55 percent.

"Altria is the ideal partner for Cronos Group, providing the resources and expertise we need to meaningfully accelerate our strategic growth," said Mike Gorenstein, Cronos Group's chairman, president and CEO. "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.

"Importantly, Altria shares our vision of driving long-term value through innovation, and we look forward to continuing to differentiate Cronos Group in this area," he added.

The investment gives Altria a foot in the door of the emerging global cannabis sector, which it believes is poised for rapid growth over the next decade. It also creates a new growth opportunity in an adjacent category that is complementary to Altria's core tobacco businesses, the Richmond-based company said.

Analysts' Take

Since 2016, Cowen and Co. held the thesis that cannabis will provide incremental growth for tobacco, according to Vivien Azer, director and senior research analyst at Cowen.

From a high-level perspective, Cowen finds this this deal encouraging, she explained, because:

  • The global cannabis opportunity remains large and untapped. Cannabis spans multiple consumer verticals including adult use as a substitute social lubricant to alcohol; health and wellness; over-the-counter pain and sleep; and pharmaceuticals.
  • U.S. tobacco is increasingly challenged by disruption and regulation.

The news came the same day that Altria announced it was discontinuing the production and distribution of all MarkTen and Green Smoke vapor products, and VERVE oral nicotine containing products, as Convenience Store News previously reported.

The decision, according to the company, was driven by the current and expected financial performance of these products, coupled with regulatory restrictions that burden Altria's ability to quickly improve these products.

"Overall, we applaud Altria's decision to pivot fast and to move into a new adjacent category (cannabis) that is complimentary to its core tobacco business," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC.

Altria has received committed financing totaling approximately CAD $2.4 billion from JPMorgan Chase Bank, N.A. Altria may consider seeking permanent financing in the future.

Perella Weinberg Partners LP is the financial advisor to Altria. Wachtell, Lipton, Rosen & Katz and Goodmans LLP are providing legal counsel to Altria for the deal. Hunton Andrews Kurth LLP is providing legal counsel to Altria regarding the financing.

Lazard Ltd. is the financial advisor to Cronos Group. Sullivan & Cromwell LLP and Blake, Cassels & Graydon LLP are providing legal counsel to Cronos Group for the deal.

Altria's wholly owned subsidiaries include Philip Morris USA Inc., U.S. Smokeless Tobacco Co. LLC, John Middleton Co., Sherman Group Holdings LLC and its subsidiaries, Nu Mark LLC, Ste. Michelle Wine Estates Ltd., and Philip Morris Capital Corp. Altria holds an equity investment in Anheuser-Busch InBev SA/NV.

Cronos Group is a globally diversified and vertically integrated cannabis company with a presence across five continents. Cronos Group operates two wholly-owned Canadian licensed producers: Peace Naturals Project Inc., which received the first non-incumbent medical cannabis license granted by Health Canada, and Original BC Ltd., which is based in the Okanagan Valley, British Columbia. Cronos Group operates a portfolio of brands, which includes Peace Naturals, a global medicinal brand and two Canadian adult-use recreational brands, COVE and Spinach. Cronos Group has multiple international production and distribution platforms across five continents.