Altria has agreed to take a 45 percent stake in Toronto-based marijuana producer Cronos Group Inc., marking a major tobacco company's first foray into cannabis.
The first Canadian cannabis grower to list its shares on a US stock market, Cronos said it plans to spend the money on product innovation, noting Altria's expertise in device technology and automation, and fuel Cronos's expansion into new countries amid a global shift toward loosening restrictions on the drug.
"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 Chairman, President, and Chief Executive Officer. "And they're seeing a ton of growth", he said in an interview.
Altria's shares increased two percent in early Friday trading while Cronos' shares soared to more than 30 percent.
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. Although cannabis consumption remains illegal at the federal level in the USA, this deal should put Cronos in the catbird seat in terms of accessing the American marijuana market, once it becomes permissible to do so.
In June, London-based tobacco company Imperial Brands Plc took an undisclosed stake in closely held Oxford Cannabinoid. Canada legalized recreational cannabis in October.
Altria's bet on Cronos could also prompt more similar deals in the sector, he added. Constellation brands said at the time that the deal would "position Canopy Growth as the global leader in cannabis production, branding, intellectual property and retailing". 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.
That would put Altria's investment in the same league as the $4 billion spent this year by Constellation Brands to acquire shares of Canopy Growth Corp., another Canadian pot producer.
It will also acquire warrants that will allow Altria to buy more stock at $19 per share within four years. It also weighed making investments in other growers, such as Aphria and CannTrust Holdings Inc., according to sources familiar with the matter who were granted anonymity because the talks were private.
Philip Morris, which was spun off from Altria and sells the Marlboro brand internationally, has been trying to get approval for Altria to market IQOS in the U.S. Separately, it has asked for regulatory permission to say the device carries a lower health risk than regular tobacco products.