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The maker of Marlboro cigarettes is muscling in on the marijuana market

Altria Group Inc., the US maker of Marlboro cigarettes, is moving into the pot sector, paying $1.8 billion for a 45% stake in Canadian cannabis firm Cronos, according to reports from Bloomberg.

In the US, legal ambiguity over marijuana use makes domestic wheeling and dealing too risky for many national and multinational businesses. But north of the border, the newly legal weed market is open for business—and Altria is the latest company to make a move to Canada, joining other companies such as liquor giant Constellation Brands.

For Altria, once known as Phillip Morris, it’s an opportunity to get comfortable in a nascent market and position itself for the potential national legalization in the US. With cigarette sales plummeting, now can hardly be a bad time to diversify, and the company is reportedly also in talks to invest in vaping startup Juul.

For Cronos, as the company said in a press release, Altria’s long history in the industry means it offers “product development and commercialization capabilities, and deep regulatory expertise.” In the meantime, Altria is paring back some of its tobacco alternatives, discontinuing vaping products MarkTen and Green Smoke, with the objective of focusing on other “more compelling reduced-risk tobacco product opportunities.”

While Marlboro-branded “weed cigarettes” are not in the pipeline, the news comes after nearly 50 years of speculation to that end. As far back as the late 1960s, Business Week reported tales through the “underground grapevine” of major cigarette companies lying in wait of legalization “so they can start producing grass-laced smokes.” Those in the know alleged that names such as Acapulco Gold and Tijuana Gold were already copyrighted in anticipation, while an unnamed cigarette company had bought up swathes of pot-appropriate farmland in Louisiana, Mexico, and Central America.

A few months later, however, letters to the Rolling Stone editor from key players in the tobacco industry sought to put the record straight. ”Rumors about the cigarette industry’s involvement with marijuana are as persistent as they are false,” said a spokesman for the Tobacco Institute. The then-president of now-defunct tobacco company Brown & Williamson was clearer still: “We are unalterably opposed to the legalization of marijuana, and therefore disclaim any activity which would remotely involve marijuana.” The times, they are a changin’.

Tobacco giant Altria is making inroads into the world of legal cannabis, buying a 45% stake in Canadian pot company Cronos.

Marijuana Marlboro And What Altria’s Purchase Of A Canadian Marijuana Maker Means

The Cannabis market was jolted on December 7th by the announcement that Altria, the maker of Marlboro cigarettes, had purchased a 45% stake in Cronos Holdings for $1.8 billion (US). The deal includes a $1.05 billion option to purchase an additional 10% in the future. While Cronos had acknowledged that discussions were in progress on December 3, the stock still shot up 28% when it was confirmed.

In retrospect, it was obvious that Altria was going to make a move into Cannabis at some point. If you look at cigarettes, the company has faced fewer Americans smoking each year since…basically the sixties. Recently, there has been a significant uptick in vaping led by JUUL Labs, another company Altria is negotiating with for a stake. However, that does not change the long-term trends facing the company’s core business in cigarettes. While Altria can lean on traditional smoking to provide high cash flow and pay dividends for a long period to come, the company has been known to look for ways to diversify its product base. By entering the cannabis market, particularly at this early date, Altria can move to take market share, research products, and position itself in new markets as they open. In short, this is a logical proactive move for the company and it should mesh well with their current experience, R&D and product lines. For investors in Altria, it is exciting to imagine a company with the kind of cash flow that exists today combined with growth in cannabis and a high dividend. An appealing combination and one that Altria could not ignore for long. A move into the cannabis space by Altria was inevitable.

Richmond, USA – May 14, 2018: Altria office sign in Virginia capital city tobacco business closeup . [+] by road street, parent company of Philip Morris

So that leads us to the next question of why they chose to partner with Cronos Group. I would argue that it is fair to characterize the Canadian cannabis market as an oligopoly led by only a few strong players. The largest is Canopy Growth, a company that is currently 38% owned by Constellation Brands with options to increases the ownership to 51% in the future so they are spoken for. If you look at the remaining players, Cronos Group was the one who best matched Altria’s style and structure in the tobacco market. Cronos preferred to develop new products and brands while focusing on distribution and R&D rather than focusing on growing supply.

A SIDE NOTE: It is interesting that early in the growth of many markets, investors and companies focus on metrics that will not matter in the future. In the Internet bubble of 1999, every company focused on-site visits or clicks. For years, Amazon only reported on the growth of Kindle. For cannabis, the focus is on how much cannabis a company can produce. Long term, we would expect few companies to produce their own cannabis, much like few cigarette companies produce their own tobacco.

Cronos Group has worked hard to be at the leading edge of medical marijuana, a space that is much closer to moving towards legalization in global markets compared to recreational. Their partnership with Ginkgo Bioworks is specifically focused on developing innovative products that could prove important to the medical side of the business.

Remember, we have barely scratched the surface of the potential of medical marijuana. There are basically two chemicals in cannabis that most consumers are talking about today, THC and CBD. THC is the drug that gets you high and is the reason people want to consume cannabis recreationally. CBD does not get you high but has been shown to potentially help patients with epilepsy, inflammation, pain, psychosis and other issues. However, there are at least 111 other cannabinoids that have been isolated from cannabis whose impacts can cause a variety of positive outcomes in everything from hunger suppression to diabetes treatments. Many of these cannabinoids are only trace amounts in natural cannabis, but the work Cronos and Ginkgo Bioworks are doing puts them in a position to create strains that highlight these cannabinoids for new treatments. Alternatively, they could produce new products or treatments that focus entirely on delivering these other cannabinoids as we see with CBD oils today. This would allow Cronos to bring new products to market that are truly unique.

This partnership means that Cronos gains access to Altria’s design, manufacturing, marketing, and distribution capabilities. Using that, Cronos is in a greater position to move into a market leading position in the developing global market for medical cannabis. Altria has planted a flag in the global medical marijuana market with this purchase. In my opinion, both companies look well positioned to benefit from this partnership.

Marlboro Cigarette maker, Altria, just bought a significant share of a Canadian marijuana maker. This could be a marriage made in heaven offering opportunities for both companies to succeed over the long-term. ]]>