By Ciara Linnane, MarketWatch
MarketWatch photo illustration/Everett Collection, iStockphoto
Shares of Canada’s Cronos Corp. rocketed more than 24% Friday, after Altria Group Inc. agreed to take a major stake in the company and become its exclusive partner in the cannabis sector as new markets for medical and recreational weed open around the world.
The news sparked a rally in the broader sector, which has been expecting moves by big tobacco, given the overlap of growing and harvesting with the burgeoning weed industry. Cronos /zigman2/quotes/206842762/composite CRON -1.11% /zigman2/quotes/202715342/delayed CA:CRON -1.21% had disclosed early talks with Altria /zigman2/quotes/208895754/composite MO +1.06% and analysts were expecting the owner of Philip Morris /zigman2/quotes/201611010/composite PM +1.19% and its Marlboro brand to make a strategic move as it struggles with regulatory challenges and changing consumer behavior in its traditional market.
Corona beer maker Constellation Brands Inc. /zigman2/quotes/207737284/composite STZ +0.33% caused a stir when it placed $4 billion in another Canadian company, Canopy Growth Corp. /zigman2/quotes/200603886/composite CGC -1.06% /zigman2/quotes/202205609/delayed CA:WEED -0.92% in August and said it may develop a line of cannabis-infused drinks for the Canadian market next year. Canada fully legalized cannabis for adult recreational use in October. The U.S. market is more challenging for cannabis companies, as the substance remains illegal at the federal level, where it is still classified as a Schedule 1 drug, putting it in the same category as heroin and cocaine. That means that companies operating in the states that have legalized medical or recreational cannabis through the ballot box are not able to have bank accounts with federally-backed institutions.
Altria is investing C$2.4 billion ($1.8 billion) to acquire a 45% stake in Cronos and will also receive warrants that, if exercised, would increase that stake to 55% and give Cronos another C$1.4 billion in proceeds. Altria is paying C$16.25 per Cronos share, a 41.5% premium over its 10-day volume-weighted average price on the Toronto Stock Exchange on November 30, the last day before Cronos disclosed the Altria talks.
“The proceeds from Altria’s investment will enable us to more quickly expand our global infrastructure and distribution footprint, while also increasing investments in R&D and brands that resonate with our consumers,” Cronos Chief Executive Mike Gorenstein said in a statement.
Wells Fargo analyst Bonnie Herzog said the news was “very positive” as it expands Altria’s total addressable market. “Overall, we applaud MO’s decision to pivot fast and to move into a new adjacent category (cannabis) that is complimentary to its core tobacco business,” she said, reiterating her outperform rating on Altria stock.
PI Financial analysts said the move is a vote of confidence in Cronos’ management, “and should have a wide positive impact on the Canadian cannabis sector as the investment validates the valuations.”
PI Financial rates the stock a buy and raised its stock price target to $24 from $15, equal to about 43% above its current trading level.
Short seller Citron Research weighed in too.
Altria is expected to bring its expertise in regulation, government affairs, and compliance, as well as technical expertise in growing, harvesting, manufacturing and marketing and supply chain management to Cronos.
Cronos has partnerships with Ginkgo Bioworks to develop cannabinoids, the ingredients found in cannabis, and with Technion Research and Development Foundation for cannabinoid skin-care treatments. Altria will have the right to nominate four directors, including one independent director, to serve on the Cronos board, which will expanded to seven directors from five as part of the deal.
The transaction is expected to close in the first half of 2019.