Altria investing $2.4B in Canadian cannabis producer Cronos

Canada voted earlier this year to legalise weed. Credit PA

Canada voted earlier this year to legalise weed. Credit PA

The Marlboro cigarette maker is taking a 45% stake in Cronos Group Inc., the Canadian medical and recreational marijuana provider said Friday. The deal also includes warrants to acquire additional ownership interest in Cronos at a price of C$19 per share over the next four years, which could raise Altria's stake to 55 per cent.

Prior to Friday's announcement, Cronos had confirmed reports that it was in talks with Altria. "This is big for everyone", Cronos CEO Mike Gorenstein said in an interview with Marijuana Business Daily.

"As a company that operates predominantly in the highly-regulated tobacco industry, we believe Altria has valuable regulatory and compliance experience that could end up being a key competitive advantage for Cronos, as it competes with other licensed producers for what seems to be a growing set of global opportunities", Canaccord Genuity analysts wrote in a research note.

Altria's entry could also help restore confidence in Canada's nascent cannabis sector. The stock closed at $17.06, up 22 per cent.

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Altria's shares increased two percent in early Friday trading while Cronos' shares soared to more than 30 percent. 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. It said it was doing so because it doesn't "see a path to leadership with these particular products", as well as the regulatory burden it faces to bring them to market. A wave of cannabis producers have set up shop in Canada, where recreational use was legalised earlier this year.

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"In Canada the focus seems to still be on capacity, but that is not what this is about", the Cronos CEO added. 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. Altria shares were up about 2.5 percent.

Cronos has partnered with Boston biotech firm Ginkgo Bioworks Inc.to genetically engineer the active compounds of cannabis.

"That experience, we think, is going to be very important as we try to accelerate new product categories".

Altria can nominate four directors, including one independent director, to the Cronos board, giving it 4-to-3 control.

The transaction is expected to close in the first half of next year.

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

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