By Harry Brumpton and Uday Sampath Kumar
(Reuters) - Marlboro cigarette maker Altria Group Inc announced a $1.8 billion investment in Cronos Group Inc on Friday, which could give it up to 55-percent ownership of the Canadian cannabis producer.
The deal represents by far the biggest investment by a major tobacco conglomerate in a cannabis company. It comes after Canada legalized the recreational use of marijuana this year, and several other jurisdictions, including some states in the United States, follow suit.
With the Cronos investment, Altria will get a new opportunity to boost revenue as cigarette smoking continues to decline in the United States. Federal data from November showed cigarette smoking among U.S. adults reached an estimated 14 percent in 2017, the lowest level ever.
"As a company that operates predominantly in the highly-regulated tobacco industry, we believe Altria has valuable regulatory and compliance experience that could end up being a key competitive advantage for Cronos, as it competes with other licensed producers for what seems to be a growing set of international opportunities," Canaccord Genuity analysts wrote in a research note.
Altria will buy 146.2 million of newly issued Cronos shares at C$16.25 per share for a 45-percent stake. The offer represents a 16.2-percent premium to the stock's Thursday close on the Toronto Stock Exchange.
The deal also includes warrants to acquire an additional ownership interest in Cronos at a price of C$19 per share over the next four years, which could raise Altria's stake to 55 percent.
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.
The deal structure was driven by an appetite on Cronos’ part to entertain discussions with other parties, although it is not guaranteed that any future discussions will result in product partnerships or new deals, according to one person familiar with the matter.
Reuters had first reported on the deal negotiations on Monday.
Shares of Altria were up 1.2 percent at $55.06 in afternoon trading, while U.S.-listed shares of Cronos were up 22 percent at $12.80.
"Altria's experience is very wide-ranging - not just in tobacco, but in adult beverages in different categories and decades of experience in how to bring different products to market," Cronos Chief Executive Officer Michael Gorenstein said on a call with analysts.
"That experience, we think, is going to be very important as we try to accelerate new product categories."
The Cronos investment follows other deals in this space.
In June, London-based tobacco company Imperial Brands Plc took an undisclosed stake in closely held Oxford Cannabinoid. Constellation Brands Inc announced a $3.8-billion investment in Canopy Growth Corp in August, while Coca-Cola Co said in September it was watching the space for alliances that could potentially help it develop products containing cannabinoid oil.
Separately on Friday, Altria said it would discontinue some of its e-cigarette brands, including all of MarkTen and Green Smoke e-vaper products, based on their financial performance and will take a related pretax charge of $200 million in the fourth quarter.
Altria has invested in e-cigarettes in recent years through its Nu Mark subsidiary, which sells devices such as the MarkTen e-cigarettes in convenience stores and tobacco shops. In 2014, Altria acquired e-cigarette startup GreenSmoke Inc for $110 million.
Altria's products, however, have lost significant ground to e-cigarette maker Juul Labs Inc over the last year, as have e-cigarette brands from other major tobacco companies.
Altria is also in talks to take a minority stake of between 20 percent and 40 percent in Juul, sources told Reuters last month.
(Reporting by Harry Brumpton in New York and Uday Sampath in Bengaluru; Editing by Sweta Singh and Nick Zieminski)