Altria buys $1.8 billion stake in a cannabis firm | CMO Strategy

By Harry Brumpton and Uday Sampath Kumar

By Harry Brumpton and Uday Sampath Kumar

One of the largest tobacco companies in the world is getting into the cannabis game.

Shares of Cronos Group Inc. jumped 31 percent and neared an all-time high at the opening bell Friday.

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. However, as part of this subscription agreement Altria will also receive warrants that, if exercised, would increase its ownership interest in Cronos to a whopping 55%. Investors, meanwhile, have been pouring money into cannabis companies that operate in multiple USA states, pivoting away from Canada.

Cronos and other cannabis stocks have been thrust into the spotlight in the past few months following the legalization of recreational marijuana in Canada in October, as well as legalized recreational and medical pot in several U.S. states last month.

"This is a huge validation of the industry and our model", Mike Gorenstein, chief executive at Cronos, said by phone.

"In fact, we think this partnership makes us collectively a more attractive partner" for other potential investors, Gorenstein said on a conference call Friday.

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

However, the global cannabis opportunity remains "large and untapped", said Vivien Azer, an analyst with Cowen.

Cronos plans to focus on cannabis genetics, innovation and branding, while contracting with farmers to grow the product and working with retailers.

The parent company of Corona beer acquired a $4 billion stake in Canada-based pot producer Canopy Growth last August, upping its ownership of the company to 38 percent from about 10 percent.

Altria is paying 16.25 Canadian dollars per share in cash, or about US$12-a 40% premium over Cronos stock's recent trading level on the Toronto exchange, where it dual-lists with the Nasdaq.

Cronos first announced that it was in talks with Altria this week.

Also, the Canadian subsidiary of Molson Coors has a joint venture with The Hydropothecary Corporation for the production of "cannabis-infused drinks" in Canada. Secondly, Altria's decision to enter this space via a rather sizable equity investment should go a long way toward legitimizing this emerging industry in the eyes of both retail and institutional investors moving forward.

With smoking rates in the United States falling fast, Altria is under pressure to find new sources of revenue. It.

Altria shares rose as much as 3.2 percent to $56.14 on Friday.

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