12/07/2018 21:11 EST | Updated 12/07/2018 21:12 EST

Marlboro's Parent Company Altria Buys Massive Stake In Cannabis Firm Cronos

The company is making a $2.4 billion investment.

This June 14, 2018, file photo shows cartons of Marlboro cigarettes on the shelves at JR outlet in Burlington, N.C.

TORONTO — Marlboro maker Altria Group Inc. will invest $2.4 billion in Canadian cannabis producer Cronos Group Inc. — marking a major foray by Big Tobacco into the pot sector — as the global market for weed continues to grow.

The Virginia-based parent of the company behind Marlboro, Parliament and other cigarette brands will acquire a 45-per-cent ownership stake in Cronos with the initial investment, announced Friday.

Altria can also invest up to a further $1.4 billion within four years that would increase its ownership stake in the Toronto-based pot producer to 55 per cent under the arrangement.

"Altria brings scale, expertise and complimentary capabilities... that we believe will enable us to expand the scope and enhance the scale of our company," said Mike Gorenstein, chairman, president and chief executive officer of Cronos on a call with analysts Friday.

This Sept. 11, 2018, file photo shows a marijuana plant in San Luis Obispo, Calif.

Cronos will remain a Canadian company, headquartered in Toronto, Gorenstein said.

As part of the agreement, Altria will have the right to nominate four directors to the Cronos board, which will be expanded to seven members from five.

Altria's investment in Cronos as its exclusive partner in the emerging global cannabis category represents an "exciting new growth opportunity" for the company, said its chairman and chief executive officer Howard Willard.

"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," he said in a statement.

Shares of Cronos surged as much as 33 per cent to $18.56 on the Toronto Stock Exchange from its $13.98 closing price on Thursday. The stock closed at $17.06, up 22 per cent.

This July 17, 2015, file photo, shows a pack of Marlboro cigarettes, an Altria brand, at a Smoker Friendly shop in Pittsburgh.

Canada on Oct. 17 became the second country in the world to legalize pot for recreational use. Several U.S. states have legalized cannabis for medical or recreational use, but pot remains illegal under federal law.

However, the political climate south of the border has been warming up to cannabis. For example, legislation that would allow for the full legalization of industrial hemp in the U.S. and ease restrictions on the cannabis compound CBD is working its way through the U.S. legislative process.

During the U.S. midterm elections, Michigan became the latest state to approval the legalization of recreational cannabis and Utah and Missouri approved the drug for medical purposes.

Number of countries with legal cannabis keep growing

As well, the number of countries that have legalized medical cannabis continues to grow, with South Korea among the latest to give the green light.

And as global cigarette consumption continues to decline, Big Tobacco has been looking for new areas for growth such as e-cigarettes and, now, pot.

The Marlboro maker's $2.4 billion bet on Cronos is by far the largest move by Big Tobacco into cannabis, and bodes well for the overall sector, said Martin Landry, an analyst with GMP Securities.

"When you look at the commitment that Altria makes, they're obviously looking at the sector for the next 10 to 20 years. And they're seeing a ton of growth," he said in an interview.

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

The deal is a "big endorsement" for Cronos and is "reassuring" for the industry, amid rising concerns that pot companies' valuations may be too lofty, Landry said.

Canadian Press
People celebrate cannabis legalization in Canada.

Many stocks in the volatile sector were up on Friday after the deal was announced. Pot producer Canopy Growth Corp's shares in Toronto rose 3.5 per cent to close at $41.75. Aurora Cannabis Inc.'s stock rose 7.8 per cent to close at $7.60 after it announced a new supply deal to Mexico.

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

Major pot stocks have generally pulled back from their highs in recent weeks amid reports of supply shortages and complications with the sales process under the new regime.

However, the global cannabis opportunity remains "large and untapped," said Vivien Azer, an analyst with Cowen. The Altria-Cronos deal is "encouraging" given the broad potential uses for cannabis such as in pharmaceuticals and health and wellness products, she said in a note to clients.

U.S. companies building presence in cannabis industry

Altria's investment marks the latest move by a U.S. company in an established industry to tap the burgeoning Canadian cannabis industry.

In August, alcohol giant Constellation Brands said it would invest an additional $5 billion in Canadian pot producer Canopy Growth Corp., increasing its stake to 38 per cent. As part of the deal, Constellation also received new warrants which, if exercised along with its existing warrants, would increase its ownership in Canopy beyond 50 per cent.

As well, U.S. tobacco leaf merchant Alliance One International said its subsidiary acquired a 75 per cent equity stake in Charlottetown-based Canada's Island Garden in January.

Meanwhile, Molson Coors launched a joint venture called Truss with Quebec-based cannabis producer Hexo Corp. in October.

Prior to Friday's announcement, Cronos had confirmed reports that it was in talks with Altria.

Altria has agreed to pay $16.25 per share to acquire 146.2 million shares of Cronos, which represents a 41.5 premium above the stock before it confirmed the companies' preliminary discussions.

It will also acquire warrants that will allow Altria to buy more stock at $19 per share within four years.

Cronos said it will use the capital to accelerate its global growth and expansion, as well as research and development. It said the deal with Altria does not limit Cronos from any other partnerships.

Gorenstein said that Altria has "decades of experience in regulatory, government affairs, compliance, product development and brand management that we expect to leverage, particularly as new markets for cannabis open around the world."