Big tobacco has been sniffing around cannabis for years. Representatives from tobacco companies have been at the big cannabis conferences for a long time, but they always stayed on the sidelines. They were going to wait until it was federally legal, but with Friday's deal between Altria Group (MO) , and Cronos Group Inc. (CRON) , the wait is over.
Cronos Group announced that it had received a $1.8 billion (C$2.4 billion) investment from Altria, the owner of Marlboro cigarette marker Phillip Morris USA. The investment comes a little more than a year after Corona beer distributor Constellation Brands (STZ) announced that it would invest billions of dollars in Canopy Growth Corp. (CGC) .
It's as if tobacco figured well, if alcohol is OK with it then so are we.
The private placement investment will give Altria a 45% stake in Cronos. Altria will receive 146.2 million shares of Cronos at closing at a price of C$16.25 per share, representing a 41.5% premium to the 10-day VWAP of the shares on the Toronto Stock Exchange on Nov. 30, 2018. In addition, Altria will receive purchase share warrants, valued at C$1.4 billion, which if exercised would give the company an additional 10% in Cronos.
Many in the cannabis industry have feared this day would come. That big tobacco would descend upon the industry and with its deep pockets and buy up companies. The concern was that big tobacco would stall the opportunities for small businesses.
The reality is that even before Altria made the deal with Cronos, consolidation was already happening in the cannabis industry. While states have worked hard to "keep it local," many original license holders had already begun to sell to larger, better-funded players via joint ventures. This is how companies such as Acreage Holdings ( (ACRZF) , ACRG.U) has a presence in 19 different states. A small business just doesn't have the resources to invest in software, security and facilities. Partnering with a larger company allows them to compete.
It's also a sign of the maturing of the cannabis industry. Cross pollination is a normal occurrence in almost any industry. Much like soda brands own flavored water companies or Scott's Miracle-Gro (SMG) , which is a fertilizer company, owns a hydroponic brand associated with cannabis.
"In our view the confluence of legislative momentum and the growing interest of traditional companies to enter the space, we'll see major deals between MSOs (Multi-State Operators) and big pharm, tobacco and alcohol continue to happen," said Kevin Murphy, CEO of Acreage Holdings. "Everyone is circling the wagons looking for companies that offer scale depth of team and a professional approach."
While Cronos Group and Altria both popped on the news, overall cannabis stocks have been trading down since October. Cronos is up almost 25% on this news to trade near $12.87, but it's still below its 52-week high of $15.30. Plus, Altria is certainly not going to be the last tobacco company to make this type of investment.
Once Constellation signaled the water was fine, other alcohol companies followed suit. Heineken (HEINY) and Molson Coors Brewing (TAP) jumped in too. This didn't mean that the cannabis industry was done, instead it demonstrated an opportunity for the product.
Now the question will be which cannabis company will be the next target? It would have to be a company with scale.
Companies that would be ideal for a big tobacco to partner with could be Curaleaf Holdings (LDVTF) , Acreage Holdings and Green Thumb Industries (GTBIF) , Grassroots and Cresco Labs (CRLBF) . To be clear, none of these companies have made any mention of talking to big tobacco. They have the scale, though, and once tobacco feels comfortable investing in a U.S. company versus a Canadian company, any of these would be ideal partners.