The maker of Marlboro cigarettes would acquire a 45 per cent ownership stake in Cronos under the initial investment. Altria has the option to gain majority control in the future.
In June, London-based tobacco company Imperial Brands Plc took an undisclosed stake in closely held Oxford Cannabinoid. "And they're seeing a ton of growth", he said in an interview.
It's clear Altria has reassessed its competitive position. It also plans to focus on more reduced-risk tobacco products. The company attributed this to regulatory restrictions and lack of financial prospects for those products. Altria shares were up about 2.5 percent. Canadian pot stocks have been crushed in recent weeks after a lacklustre start to recreational sales amid reports of countrywide supply shortages.
Cronos shares, meanwhile, surged as much as 33 percent to $13.95 in NY.
Altria will acquire 146.2 million Cronos shares at a price of CA$16.25 per share, representing a 41.5% premium to the 10-day average price ending November 30, the last unaffected trading day before Cronos publicly disclosed discussions with Altria. Peers in the marijuana sector also gained, with Aurora Cannabis Inc. rising as much as 11 percent, Aphria Inc. adding 14 percent, Canopy Growth Corp. rising 7.3 percent and Tilray Inc. gaining 4.8 percent.
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The agreement allows Altria to nominate four directors to Cronos' board of directors, including one independent director.
However, the global cannabis opportunity remains "large and untapped", said Vivien Azer, an analyst with Cowen. Altria is paying 25 times forward sales, she said, and in her view, Altria is "buying their way out of a bind" after nearly two decades of volume decline for USA cigarettes, and a challenging 2018 for e-cigarettes.
"Investing in Cronos Group as our exclusive partner in the emerging global cannabis category represents an exciting new growth opportunity for Altria", Howard Willard, Altria's chairman and chief executive officer said in a statement. It said the deal with Altria does not limit Cronos from any other partnerships.
Altria now has been grappling with a Food and Drug Administration that's intent on strengthening restrictions on some of the vaping products that have caught on with younger users. Cronos now finds itself among a small pool of well-capitalized cannabis companies that can expand its offerings more effectively in Canada, internationally and, once it becomes federally legal, the United States. The company's shares have fallen as low as $3.40 since it announced it revised the terms of a bought deal last month to $75 million from a previously announced amount of $120 million. "I think it's worth noting that Altria doesn't grow their own tobacco. That was something we're very aligned with".