"We believe cannabis is an excellent strategic fit for tobacco,"
Jefferies analyst Owen Bennett said in a research note earlier this
week. It's a logical fit, because "big tobacco knows how to
cultivate crop, knows how to deal with regulators, they are at the
forefront of vaporization technology, and they also arguably have
less reputational risk than other fast-moving consumer goods," he
said.
It's clear Altria has reassessed its competitive position. It
also announced Friday that it will discontinue two of its
next-generation tobacco products and its oral nicotine-containing
ones to focus on "more compelling reduced-risk tobacco product
opportunities." The company attributed this to regulatory
restrictions and lack of financial prospects for those
products.
Altria shares rose as much as 3.2 percent to $56.14 on Friday.
Its stock had fallen 24 percent this year through Thursday's close
-- illustrating how investors had become pessimistic about the
company's future amid rising regulations and taxes on tobacco.
Cronos shares, meanwhile, surged as much as 33 percent to $13.95
in New York. Altria's offer of C$16.25 a share represents a 16
percent premium from Thursday's closing price. Peers in the
marijuana sector also gained, with Aurora Cannabis Inc. rising as
much as 11 percent, Aphria Inc. adding 14 percent, Canopy Growth
Corp. rising 7.3 percent and Tilray Inc. gaining 4.8 percent.
The deal will expand Cronos' board from five to seven seats,
with Altria getting a total of four of them.
Cowen analyst Vivien Azer said it's not surprising that Altria
opted for a pathway to a majority control of Cronos. Altria is
paying 25 times forward sales, she said, and in her view, Altria is
"buying their way out of a bind" after almost two decades of volume
decline for U.S. cigarettes, and a challenging 2018 for
e-cigarettes.
Cronos CEO Mike Gorenstein said the partnership with Altria
doesn't limit the cannabis firm from engaging with other strategic
partners. "In fact, we think this partnership makes us collectively
a more attractive partner" for other potential investors,
Gorenstein said on a conference call Friday. The most attractive
piece of the partnership is Altria's experience dealing with
regulatory agencies, he said.
Altria currently has been grappling with a Food and Drug
Administration that's intent on strengthening restrictions on some
of the vaping products that have caught on with younger users.
Philip Morris International Inc., which was spun off from Altria
and sells the Marlboro brand internationally, has been trying to
get U.S. approval for Altria to market its IQOS device. Separately,
it has asked for regulatory permission to say the device carries a
lower health risk than regular tobacco products.
Cronos's Gorenstein said his company and Altria agree that
developing brands and intellectual property is more valuable than
growing plants and should be the focus going forward.
"When we were strategically planning how we would enter cannabis
years ago, one of the companies that we looked at and had a lot of
respect and admiration for was Altria," he said. "It's worth noting
that Altria does not grow their own tobacco. We think that model of
growing your own plants is very difficult to scale and to execute
well. That was something we're very aligned with."
-Bloomberg News
