Marlboro Maker Investing $2.4 Billion In Marijuana Market

An employee tends to marijuana plants at the Aurora Cannabis facility in Edmonton Alberta one of Canada’s largest marijuana companies

The cigarette maker's move follows modest investments in the cannabis sector in the past year by tobacco companies Imperial Brands and Pyxus International, formerly Alliance One International.

Altria Group Inc., the maker of Marlboro cigarettes, has struck a deal to buy a large stake in Cronos Group Inc., a cannabis grower in Toronto.

With the Cronos investment, Altria will get a new opportunity to boost revenue as cigarette smoking continues to decline in the United States. On Tuesday, ultra-conservative Utah became the latest state to legalize marijuana use for medical purposes. Constellation brands said at the time that the deal would "position Canopy Growth as the global leader in cannabis production, branding, intellectual property and retailing".

After the deal is closed, Altria will have the right to nominate four directors, including one independent, to Cronos' board comprising seven directors in total. Peers in the marijuana sector also gained, with Aurora Cannabis Inc. rising as much as 11 percent, Aphria Inc. adding 14 percent, Canopy Growth Corp. rising 7.3 percent and Tilray Inc. gaining 4.8 percent.

"We believe an investment of this magnitude provides overall legitimacy to the industry as a whole and should represent a positive catalyst for the sector, with the news likely to drive valuations higher", said Canaccord Genuity analyst Matt Bottomley, who has a 12-month price target of $9 on Cronos's stock and a "hold" rating.

Altria has agreed to pay $16.25 per share to acquire 146.2 million shares of Cronos, which represents a 41.5 premium above the stock before it confirmed the companies' preliminary discussions. We think that model of growing your own plants is very hard to scale and to execute well.

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The transaction is expected to finalize within the first half of 2019.

Altria is also in talks to take a minority stake of between 20 percent and 40 percent in Juul, sources told Reuters last month.

Gorenstein said that Altria has "decades of experience in regulatory, government affairs, compliance, product development and brand management that we expect to leverage, particularly as new markets for cannabis open around the world".

Short-seller Andrew Left of Citron Research, who has been a critic of Cronos and was betting against the stock going into Friday, said that this deal shows why Canadian growers trade at a premium to USA -based cannabis companies.

Marijuana, while still illegal on the federal level in the U.S., is allowed in an increasing number of states.

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