Altria's $1.8 Billion Bet On Cronos Is Both Risky And Expensive

Dec. 14, 2018 9:06 AM ETCronos Group Inc. (CRON), MO, CRON:CA130 Comments
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Cornerstone Investments


  • Altria announced an investment of $1.8 billion to acquire 45% of Canadian cannabis company Cronos at C$16.25 per share.
  • The deal also included warrants that would allow Altria to acquire an additional 10% stake at a price of C$19.00 per share.
  • Cronos management did a great job to negotiate this deal but we struggle to understand why Altria picked Cronos versus its competitors.
  • Altria bought into one of the most expensive cannabis stocks and received one of the least attractive asset profiles in Canada and abroad.

Cronos (NASDAQ:CRON) became the second cannabis company to receive a major equity investment from a tobacco/alcohol giant. Altria (NYSE:MO), the owner of Marlboro, announced a $1.8 billion investment in the Canadian cannabis company last Friday, just a few months after Constellation (STZ) invested $4 billion in Canopy (CGC). The news broke out on the Friday of a week that was being roiled by the Aphria's (APHA) short report that set off a sector-wide selloff. However, we remain suspicious of the merits of this deal and we think Altria has placed a risky bet as it enters the cannabis sector in a major way. We have long been critical of Cronos and our fundamental view on the company remains the same. We are upgrading Cronos to Neutral on the basis that the transaction and resulting cash balance will provide Cronos with unparalleled access to domestic and international growth opportunities.

Altria's Investment

On Friday, the tobacco giant Altria announced that it is acquiring 45% of Cronos for $1.8 billion dollars at a price of C$16.25 per share. The deal also included warrants for Altria to acquire an additional 10% at C$19.00. It is important to know that media already reported on the talk between Cronos and Altria on Monday. Cronos shares rose 10.7% on the news on Monday and the shares continued to climb and ended the week 39.8% higher. We would think that the premium that Altria paid was more in the 40% range.

(Source: TSX Website)

The deal resembles the $4 billion investment made by Constellation into Canopy Growth but there are also several differences. First of all, Altria acquired 45% of Cronos at once whereas Constellation started with a much smaller investment in Canopy and only in August boosted its stake to 38% with warrants to up its stake to more than 50%. Secondly, the

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