Last week, Tobacco giant Altria announced that it is investing $1.8 billion to Canadian cannabis brand, Cronos Group, confirming industry rumors that have actually helped the Canada-based firm’s stock to soar even before the announcement.
The first week of December brought a boost in the stock price of Canada’s Cronos Group. Rumors were flying that Altria was in talks with Cronos regarding a possible acquisition of the cannabis company. That rumor was downgraded to a possible investment but interest in the stock continued though many analysts think Cronos is overvalued. Variations on this pattern are now common given that big tobacco companies are investigating the cannabis market and will likely be gathering information in a variety of ways.
Acquisition rumors quickly downgraded
Rumors of acquisition talks between U.S. tobacco giant Altria Group Inc (NYSE: MO) and Canadian cannabis company Cronos Group Inc (TSE: CRON) sent the stock price of Cronos rising. Cronos quickly issued a statement on December 3rd saying that they were “engaged in discussions concerning a potential investment by Altria Group Inc.” Despite that clarification, numerous media outlets continued to report that an acquisition might be in the works.
On December 2nd Reuters reported that Altria was in acquisition talks with Cronos and then followed on the 3rd with a clarification regarding the Cronos statement. The Reuters coverage seemed to be the starting point for widespread speculation and a big boost in CRON’s price. Given that major consumer brands, including big tobacco brands, are examining and investing in the cannabis industry, it is not surprising that investors are flocking to companies that have their attention.
Altria has been checking out cannabis companies and has an even stronger interest in e-cigarette company JUUL. Altria subsidiary Philip Morris also developed the new smoke-free tobacco device iQOS. Like other big tobacco companies, Altria is exploring multiple possibilities for growth as long-term tobacco sales are in doubt.
That means Altria and other major companies will continue to talk with a wide range of cannabis companies and rumors will continue to stir the market as happened with Aphria Inc (TSE:APHA). Altria’s interest in Tilray Inc (NASDAQ: TLRY) has also been widely noted. While such talks may one day lead to investments or acquisitions, Altria seems to be relatively hesitant about the cannabis space.
The announcement confirmed that Altria will have a 45 percent stake in Cronos, with option to increase its stake to 55 percent within the next five years.
The future of Altria and Cronos
Before the confirmation of the $1.8 billion investment, at least one analyst thinks that Altria will not be making big moves into cannabis anytime soon. Seeking Alpha’s Grant Beaty points out that Altria has stated repeatedly that it “would not enter the cannabis space unless it became federally legal.” He points to other reasons, including a stance that companies like Aphria and Cronos are too highly valued “relative to the value they’d likely offer Altria.”
The Motley Fools’ George Budwell is also concerned by Cronos’ high valuation. He maintained that, though business is good and likely to get better for Cronos, that they do not have a strong competitive moat. However, he points to a deal with Ginkgo Bioworks which could lead to unique, patented cannabis products “targeting a wide variety of common ailments.”
With last week’s announcement, however, one thing remains true: As giant companies show support in the budding cannabis business in Canada (and maybe the U.S.), the industry is poised to become one of the most formidable businesses today.