Tobacco giant Altria Group Inc. has agreed to spend $1.8 billion for an ownership stake in a Canadian marijuana company in the first major move by a large cigarette maker into the cannabis market, which has been growing as more governments legalize its use.
The decision by the Henrico County-based company to invest in cannabis, which remains illegal at the federal level in the U.S., comes as Altria and other cigarette makers have been trying to diversify their sales to offset declines in cigarette consumption.
Meanwhile, Altria also said it will discontinue two of its e-cigarette products, fueling talk that a potential deal with Juul Labs Inc. could come soon.
Altria plans to take a 45 percent ownership stake in Cronos Group Inc., a Toronto-based company that produces and sells dried cannabis and cannabis oils.
The deal, expected to close in the first half of 2019, requires regulatory approval and approval by Cronos shareholders. Altria could increase its ownership stake in the company to 55 percent over four years through stock purchase warrants.
Founded in 2012, Cronos operates two wholly owned producers of cannabis with production facilities in Ontario and British Columbia. Its products include the medical cannabis brand Peace Naturals and two adult-use recreational brands, Cove and Spinach.
Altria said in a statement Friday that it believes the global cannabis market is “poised for rapid growth over the next decade.”
“It also creates a new growth opportunity in an adjacent category that is complementary to Altria’s core tobacco businesses,” the company said.
Canada legalized marijuana for adult recreational use in October. Cannabis is still illegal at the federal level in the U.S., but many states have moved to legalize it.
Buying a stake in a Canadian cannabis company “is not inconsistent with [Altria’s] position to stay out of the U.S. with cannabis until it becomes federally permitted,” industry analyst Bonnie Herzog of Wells Fargo Securities wrote in a research note to investors on Friday.
Altria “brings regulatory, marketing and brand management expertise to Cronos, which should help to accelerate the growth of the company,” Herzog wrote.
Some market research has indicated the cannabis industry in the U.S. could generate $11 billion in sales in 2018 and could be worth $75 billion by 2030.
“Investing in Cronos Group as our exclusive partner in the emerging global cannabis category represents an exciting new growth opportunity for Altria,” said Howard Willard, Altria’s chairman and CEO, in a statement.
“We believe that Cronos Group’s excellent management team has built capabilities necessary to compete globally, and we look forward to helping Cronos Group realize its significant growth potential,” said Willard, who became Altria’s top executive in May.
Cronos does not have any U.S. operations, a spokesman for Altria Group said.
A major employer in the Richmond region, Altria is the parent company of top U.S. cigarette maker Philip Morris USA. The Richmond area is home to its headquarters, its cigarette production facilities, and a research and development facility.
With cigarette consumption slowly declining — industry shipment volumes declined about 4 percent in 2017 — Altria has been venturing into alternative tobacco products.
The company reportedly has been in talks to make a significant investment in one of the leading electronic cigarette makers, Juul Labs. However, electronic cigarettes have been facing significant pushback from public health authorities because of rising underage use.
“The bottom line is the tobacco companies need to figure a way to grow revenues in the face of declining cigarette revenues and uncertainty over just how fast alternative cigarette product revenues are going to grow,” said Steve Marascia, director of research at Capitol Securities Management in Henrico.
The Canadian cannabis market “potentially is a multibillion-dollar market,” Marascia said. “And if the U.S. ever allows the legalization of marijuana down here, it will be an even bigger market.”
Altria introduced some of its own e-cigarette brands, but those products have not gained as much traction as expected, and on Friday the company said that it would discontinue its MarkTen and Green Smoke e-cigarette products and its VERVE oral nicotine products.
Those products are not manufactured in the Richmond area, but their discontinuation still may result in some job losses in the region, a company spokesman said.
“We plan to let affected employees know as soon as possible and as always treat them with integrity and respect,” the company said.
The decision to discontinue those brands “is based upon the current and expected financial performance of these products, coupled with regulatory restrictions that burden Altria’s ability to quickly improve these products,” the company said. “The company will refocus its resources on more compelling reduced-risk tobacco product opportunities.”
The discontinuation of the e-cigarette brands is “a surprise move,” said Herzog, the Wells Fargo Securities analyst. However, it indicates Altria may have decided to focus on more promising alternative products such as IQOS, a “heat-not-burn” product developed by Philip Morris International Inc., a former subsidiary that Altria spun off in 2008.
Under the terms of its deal with Cronos Group, Altria will be able to nominate four directors, including one independent director, to serve on Cronos’ board, which will be expanded from five to seven directors.
Altria has agreed to pay $16.25 per share in Canadian dollars for newly issued Cronos Group stock. If Altria increases its ownership stake, it would pay $19 per share in Canadian dollars for additional Cronos stock.
Cronos Group reported sales of $4.1 million in Canadian dollars for 2017, a 636 percent increase from the previous year. It reported profit of $2.5 million for 2017. In the first nine months of 2018, the company reported revenue of just over $10 million Canadian dollars.
The Canada-based investment banking firm Canaccord Genuity said in a report Friday that it believes an investment the size of Altria’s in cannabis “provides overall legitimacy to the industry” and should drive valuations higher.