Altria’s Canadian Pot Bet Is Really About the U.S.

(Bloomberg Opinion) -- It's official: Big Tobacco is now a player in the cannabis market. That will change the game. 

Altria Group Inc., the maker of Marlboro cigarettes, announced Friday that it agreed to pay $1.8 billion for a 45 percent stake in Cronos Group Inc., one of Canada's fast-growing cannabis companies. The deal comes about two months after Canada legalized marijuana for adult use, though American giants that have begun to show interest in cannabis are doing so with an eye toward the larger U.S. market. Pot is still federally illegal in the U.S., but a significant investment from Altria — which doesn't often make big purchases — signals that an industry most astute to the regulatory landscape sees legalization just around the corner. It also validates what's been a hot area for stocks that some feared might turn out to be a bubble. 

Altria is paying up for the deal. The C$16.25-a-share price tag is 34 percent higher than Cronos's average price over the last 20 trading sessions, and it's nearly a 60 percent premium to the stock's level before speculation began brewing in late August that companies such as liquor maker Diageo Plc were considering deals for cannabis businesses. To put that in perspective, acquisitions in the $1 billion range this year for North American companies had an average takeover premium of 22 percent, according to data compiled by Bloomberg. And while Altria isn't technically taking control of Cronos, it is adding four directors of its choosing to Cronos's board. Altria also has a warrant to increase its ownership to as much as 55 percent over the next four years at a price of C$19 a share. 

It's about time Big Tobacco made its move. Constellation Brands Inc., the company behind Robert Mondavi wins, Svedka vodka and Corona's U.S. business, has made the biggest bet on cannabis so far, with a $4 billion investment in Canopy Growth Corp. earlier this year. While the cannabis business opportunity extends far beyond smoking, the industry has long seemed like the future for Big Tobacco as cigarette smoking wanes in popularity. And whether some cannabis companies prefer not to align themselves with the tobacco industry, having its lobbying power in Washington helps. 

Altria's dealmaking is unlikely to stop here, and Cronos may just be one piece of the puzzle. The $102 billion company has also reportedly entered talks for a stake in Juul Labs Inc., the maker of the controversial e-cigarettes that was valued at about $15 billion in its latest fundraising round. Should Altria consummate that deal, too, a logical next step would be to recombine with Philip Morris International Inc., its former overseas division that was spun off a decade ago and sells tobacco products outside North America.

Philip Morris, which has a market cap of $133 billion, developed and sells iQos, a device that's an alternative to traditional smoking and heats a mini tobacco stick instead of burning like cigarettes do. Given that Altria has a licensing agreement to sell iQos in the U.S. once it receives regulatory approval, the product is critical to both companies' smokeless futures. With iQos appealing to slightly older smokers and Juul targeting millennials, the products may be complementary, according to Bonnie Herzog, an analyst for Wells Fargo & Co. 

Now that Altria has tested out the M&A market, it may not be ready to quit. 

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

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