By Ciara Linnane, MarketWatch
News sends cannabis sector sharply higher as investors expect further investments from major companies
Shares of Canada's Cronos Corp. rocketed more than 24% Friday, after Altria Group Inc. agreed to take a major stake in the company ( become its exclusive partner in the cannabis sector as new markets for medical and recreational weed open around the world.
The news sparked a rally in the broader sector, which has been expecting moves by big tobacco, given the overlap of growing and harvesting with the burgeoning weed industry. Cronos (CRON.T) (CRON.T) had disclosed early talks with Altria (MO) and analysts were expecting the owner of Philip Morris (PM) and its Marlboro brand to make a strategic move as it struggles with regulatory challenges and changing consumer behavior in its traditional market.
Corona beer maker Constellation Brands Inc. (STZ) caused a stir when it placed $4 billion in another Canadian company, Canopy Growth Corp () (WEED.T) in August and said it may develop a line of cannabis-infused drinks for the Canadian market next year. Canada fully legalized cannabis for adult recreational use in October. The U.S. market is more challenging for cannabis companies, as the substance remains illegal at the federal level, where it is still classified as a Schedule 1 drug, putting it in the same category as heroin and cocaine. That means that companies operating in the states that have legalized medical or recreational cannabis through the ballot box are not able to have bank accounts with federally-backed institutions.
Altria is investing C$2.4 billion ($1.8 billion) to acquire a 45% stake in Cronos and will also receive warrants that, if exercised, would increase that stake to 55% and give Cronos another C$1.4 billion in proceeds. Altria is paying C$16.25 per Cronos share, a 41.5% premium over its 10-day volume-weighted average price on the Toronto Stock Exchange on November 30, the last day before Cronos disclosed the Altria talks.
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"The proceeds from Altria's investment will enable us to more quickly expand our global infrastructure and distribution footprint, while also increasing investments in R&D and brands that resonate with our consumers," Cronos Chief Executive Mike Gorenstein said in a statement.
Wells Fargo analyst Bonnie Herzog said the news was "very positive" as it expands Altria's total addressable market. "Overall, we applaud MO's decision to pivot fast and to move into a new adjacent category (cannabis) that is complimentary to its core tobacco business," she said, reiterating her outperform rating on Altria stock.
PI Financial analysts said the move is a vote of confidence in Cronos' management, "and should have a wide positive impact on the Canadian cannabis sector as the investment validates the valuations."
PI Financial rates the stock a buy and raised its stock price target to $24 from $15, equal to about 43% above its current trading level.
Short seller Citron Research weighed in too.
Altria is expected to bring its expertise in regulation, government affairs, and compliance, as well as technical expertise in growing, harvesting, manufacturing and marketing and supply chain management to Cronos.
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Cronos has partnerships with Ginkgo Bioworks to develop cannabinoids, the ingredients found in cannabis, and with Technion Research and Development Foundation for cannabinoid skin-care treatments. Altria will have the right to nominate four directors, including one independent director, to serve on the Cronos board, which will expanded to seven directors from five as part of the deal.
The transaction is expected to close in the first half of 2019.
Separately, Altria said it is discontinuing its MarkTen and Green Smoke e-vape products (), along with Verve oral nicotine-containing products in response to regulatory restrictions that will hamper its effort to improve their financial performance.
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To see all of MarketWatch's coverage of the cannabis sector, click here ().
The tobacco giant said it will refocus its efforts on reduced-risk tobacco product opportunities.
"We do not see a path to leadership with these particular products and believe that now is the time to refocus our resources," Chief Executive Howard Willard said in a statement. Altria is expecting to book a roughly $200 million pretax charge in the fourth quarter, most of which will be a non-cash asset impairment charge.
Wells Fargo's Herzog welcomed that move too and said she expects an announcement to acquire a stake in e-cigarette maker Juul "very soon".
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Elsewhere in the cannabis sector, Aurora Cannabis Inc. (ACB.T) (ACB.T) surged 10% after it said it was expanding into Mexico with the establishment of an exclusive supply deal with Farmacias Magistrales S.A. The company said Farmacias, a pharmaceutical manufacturer and distributor that reaches 80,000 retail points and 500 pharmacies and hospitals, recently received the first import license graded from the Mexico's Federal Commission for Protection Against Health Risks, which allows the company to import medical cannabis containing THC.
"This new exclusive partnership further expands Aurora's early mover advantage in Latin America, allowing us to become a leading player in the development of the medical cannabis system in Mexico, a legal market of 130 million people," said Aurora Chief Executive Terry Booth.
Green Organic Dutchman Holdings (TGOD.T) was up 10.5%, Aphria Inc. (APHA.T) was up 4.1%, Aleafia Health Inc. was up 5.6%.
Canopy Growth was up 3.75, Tilray Inc. was up 1.2% and Hexo Corp. (HEXO.T) was up 3.7%.
Cannabis Sativa Inc. (CBDS) was up 8.4% and GrowGeneration Corp. (GRWG) was up 2.5%.
The ETFMG Alternative Harvest ETF (MJ) was up about 7% and the Horizons Marijuana Life Sciences ETF was up 5.5%.
Altria was up 2.2%, but is down 22% in 2018, while the Dow Jones Industrial Average has gained 1% and the S&P 500 has gained 0.9%.
Additional reporting by Tomi Kilgore
-Ciara Linnane; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
December 10, 2018 07:48 ET (12:48 GMT)
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