Altria Growth Quest Intensifies With Cronos Weed Talks

(Bloomberg) -- Altria Group Inc., eager to find a way to grow as tobacco smoking rates decline, appears poised to enter the market for cannabis.

The seller of Marlboros in the U.S. is in early talks with Canadian marijuana producer Cronos Group Inc. about a possible investment, according to a statement from Cronos late Monday. Shares of the Canadian company climbed as much as 9.2 percent in late trading after the announcement. The stock soared as much as 30 percent in regular trading after Reuters reported the companies were in talks, while Altria gained as much as 2.4 percent.

Cronos hasn’t agreed to a deal and there can be no assurance that talks will lead to an investment or other transaction, according to the statement. An acquisition of Cronos, now Canada’s fourth-largest cannabis company by market valuation, would give Altria a vehicle to enter the fast-growing marijuana industry. It would also mark the first foray by a major tobacco company into the sector.

Chief Executive Officer Howard Willard, who took the reins at Altria in May, is clearly looking for a way to overcome the steady decline of smoking rates. The company remains in talks with popular e-cigarette maker Juul Labs Inc., a person with knowledge of the matter said on Monday. With Altria’s stock down more than 20 percent this year, the pressure is rising for the Richmond, Virginia-based company to find new sources of revenue.

Surging Market

Cannabis could be that engine. The industry in the U.S. is on track to generate $11 billion in sales in 2018, Arcview Market Research and BDS Analytics said in a report earlier this year. As more states move toward legalization, the U.S. pot market could be worth $75 billion by 2030, according to an estimate from Cowen & Co.

Canada legalized marijuana for adult use in October -- the first Group of Seven country to do so -- giving companies a broad testing ground. While cannabis is still illegal on the federal level in the U.S., many states have moved to legalize it.

The cannabis industry has been developing more quickly than expected, and “large scale consolidation” is a real possibility, Cowen analyst Vivien Azer said in a Nov. 20 research note. The alcohol industry has already started investing in pot, and companies that are “most exposed to substitution risk” -- like tobacco businesses -- are expected to follow suit.

Altria, one of the world’s most profitable consumer-products companies, is facing declining volumes of cigarette sales, spurring its expansion into alternative tobacco products. Margins are still healthy, and expected to stay so, according to Moody’s analyst Kevin Cassidy. But litigation poses a challenge, and government efforts to curb tobacco-related disease and death also creates “increasing regulatory risk,” he said in a Nov. 11 research note.

Philip Morris

Altria’s sister company, Philip Morris International Inc., has said it isn’t interested in getting into cannabis. Chief Financial Officer Martin King in a November interview with Bloomberg reaffirmed that, saying the company has a lot going on in the tobacco space already. It has a “heat not burn” tobacco device, IQOS, which Altria would market in the U.S. if it gets regulatory approval. If not, Juul could offer another growth vehicle if a deal with Altria comes to fruition.

Altria shares rose 1.6 percent to $55.73 in New York. Philip Morris International stock reversed earlier losses to rise 0.6 percent to $87.08. Cronos climbed 11 percent to $10.17.

Cronos would represent a sizable investment in cannabis for Altria, with a market value of $1.8 billion. The Toronto-based company has operations on five continents and a Canadian growing capacity that’s expected to rise to 40,000 kilograms a year. It has a joint venture with U.S. cannabis retailer MedMen Enterprises Inc. to develop branded products and open stores across Canada. It also has a partnership with Ginkgo Bioworks Inc. to genetically engineer cannabinoids.

Valuations of Canadian marijuana companies have ballooned this year as the market continues to open up and stigmas shrink.

The Reuters report led cannabis shares to briefly pare earlier declines Monday, prompted after a short seller called Aphria Inc. a “black hole.” Aphria, one of Canada’s biggest pot companies, said the allegations were “false and defamatory.” The company’s shares dropped 28 percent to C$7.60. Canopy Growth Corp. and Aurora Cannabis Inc. also fell.

--With assistance from Janet Freund.

To contact the reporters on this story: Tiffany Kary in New York at tkary@bloomberg.net;Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Jonathan Roeder, Lisa Wolfson

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