Marlboro's Parent Company Altria Buys Massive Stake In Cannabis Firm Cronos

Can weed make you some green? What you need to know about investing in pot

Altria, the owner of Marlboro and Philip Morris, has made a $1.8bn (£1.4bn) investment in Canadian pot company Cronos Group as Big Tobacco takes one of its biggest bites yet of the fast-growing cannabis market.

Altria will pay another $1.4 billion for warrants that if exercised, would give the Altria a 55 percent ownership stake in the Toronto company.

Prior to Friday's announcement, Cronos had confirmed reports that it was in talks with Altria. 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. The offer represents a 16.2-percent premium to the stock's Thursday close on the Toronto Stock Exchange.

Altria will nominate four directors to Cronos's board, which will increase to seven directors from five.

Cronos, meanwhile, grows and sells medical and recreational cannabis in Canada, operating two growing facilities in Ontario and one in British Columbia.

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.

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

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"With Democrats winning control of the U.S. House, Congress may finally pass the Farm Bill, which would make it legal to produce hemp and potentially open the door for more products containing cannabidiol or CBD", the report stated.

Investors seem to be betting that more deals could be coming. It is the Virginia-based company's first foray into cannabis.

That would mean Altria's investment would be in the same league as the $4 billion spent earlier this year by Constellation Brands to acquire shares of Canopy Growth Corp., another Canadian pot producer. 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. This initial equity investment equates to a noteworthy 45% ownership stake in Cronos.

The Canadian subsidiary of Molson Coors (TAP) has a joint venture with The Hydropothecary Corporation to produce cannabis-infused drinks for the Canadian market. It said the deal with Altria does not limit Cronos from any other partnerships.

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

Separately Altria also said it would discontinue some of its e-cigarette brands, including all of MarkTen and Green Smoke e-vaper products, based on their financial performance and will take a related pretax charge of US$200 million in the fourth quarter.

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