Dec 7, 2018

How the Cronos-Altria deal sets up a ‘clash of the cannabis titans’

Big pharma firm might be next to enter the cannabis space


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In the end, the Marlboro Man couldn’t ignore cannabis any longer.

Altria Inc. (MO.N), the maker of Marlboro cigarettes, announced Friday it will spend $2.4 billion for a 45 per cent stake in Cronos Group Inc. (CRON.TO), several days after the Canadian cannabis producer confirmed it had engaged in discussions with the tobacco giant.

The deal marks the second-biggest investment in the cannabis space by a major U.S. player following Constellation Brands Inc.’s $5 billion investment in Canopy Growth Corp. in August. It is also another growing sign that vice industries such as alcohol and tobacco are moving full bore into the burgeoning pot industry, in a bid to stem declining usage in their own traditional sectors.

“This is the next chapter in the story of the clash of the cannabis titans,” said Steve Ottaway, managing director of investment banking at GMP Securities, in an interview with BNN Bloomberg.

Cronos Chief Executive Officer and President Mike Gorenstein said in a phone interview with BNN Bloomberg following the deal’s announcement that the company aims to use its new capital infusion for developing new products beyond dried flower, such as innovative vaporizers. Gorenstein said Cronos also plans to strengthen its understanding of the genetic background of the cannabis plant.

“Leveraging some of [Altria’s] expertise and leveraging the consumer insights that we have on cannabis and the productizing devices is a big area for us. That flows through to branding, marketing, sales and distribution,” Gorenstein said.

The deal also gives Cronos a significant advantage against its Canadian peers if the U.S. market liberalizes cannabis consumption either in recreational marijuana, or through the hemp market with cannabidiol. However, Gorenstein said the company is prepared to wait and see how U.S. federal agencies such as the Food and Drug Administration interpret the new laws and make it accessible for a company like Cronos to invest in the space.

“We’re not done,” Gorenstein said. “We have access to new resources and we have an amazing new partner, but we’ve got to build. There’s a lot of work to do. This isn’t the end for us. This is more of a beginning.”

The Altria deal also doesn’t preclude Cronos from making additional partnerships in the alcohol or pharmaceutical space, Gorenstein said during a Friday morning conference call with analysts.

Shares in Cronos were up nearly 21 per cent Friday afternoon to $16.90 on the Toronto Stock Exchange, while Altria edged up 0.09 per cent to US$54.45 on the New York Stock Exchange.

Bruce Linton, co-chief executive and chairman of Canopy Growth – who steered the cannabis industry to its first cross-sector, billion-dollar investment deal – said he’s not worried about competing alongside the likes of the Marlboro Man.

“Our competition is whether global public policy happens so that you can implement legal cannabis,” Linton said. “I don’t mind the guys at Cronos, because I don’t think they’re going to damage the sector.”

But now, with Cronos and Canopy emerging as the key cannabis players that have hitched their wagons to major U.S. companies, the industry should soon expect a flood of other major consumer-packaged-goods firms making their own pot announcements soon with Canadian players before pivoting south of the border when the time is right, said Paul Rosen, chief executive officer of Tidal Royalty Corp.

Altria-Cronos deal validates the size of the crossover market: Money manager

Bruce Campbell, president and portfolio manager at StoneCastle Investment Management, joins BNN Bloomberg to provide perspective on Altria buying a large share of Cronos Group, a move that points to the large space for crossover deals in the cannabis industry.

“It ratchets up the pressure for similar companies to keep up while reaffirming that the Canopy investment wasn’t a one-off,” Rosen said in a phone interview with BNN Bloomberg.

Rosen is the co-founder and former chief of PharmaCan Capital Corp. and left the company in May 2016 before it went through a corporate rebrand to become Cronos several months later.

However, any deal is likely to face greater scrutiny going forward, especially following a report by short sellers on Monday that questioned Aphria Inc.’s acquisitions of Latin American operations and alleged the deals involved insider self-dealing. The report spooked investors and pushed the Leamington, Ont.-based pot producer’s market valuation to slide by as much as 50 per cent before paring its losses by the end of the week.

“Cronos is someone you can reliably work with, and I think that’s something the tobacco guys want,” Linton said.

“Now, there’s one less capable partner to work with. Almost every capable partner to work with has either the letter ‘C’ and almost never the letter ‘A.’ What I think you’re going to find is, you’re going to have to go further down the alphabet to find partners. There aren’t that many letters in the alphabet that have good partners.”

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.