Shares of Canadian cannabis company, Cronos Group Inc. (CRON - Free Report) soared after the company announced that leading tobacco company, Altria Group, Inc. (MO - Free Report) will make an approximately C$2.4-billion equity investment in the former.
Notably, Cronos Group’s shares have gained 38.7% in the year so far, against the industry’s decline of 22.6%.
Financial Details of the Transaction
The investment will be made on a private-placement basis in exchange for common shares in the capital of the company. Per the agreement, Altria has agreed to acquire 146.2 million shares at a price of C$16.25 per share. As a result, Altria will have roughly 45% ownership in Cronos Group.
In addition, Altria will also receive warrants of Cronos Group that, if fully exercised, would provide the former with an additional approximately C$1.4 billion of proceeds. Moreover, the exercise of the warrants would result in incremental ownership of 10% for a total potential ownership position of 55%.
The transaction is expected to close in the first half of 2019, subject to certain customary closing conditions including the receipt of approval from the TSX, and the receipt of regulatory approval pursuant to the Investment Canada Act.
Strategic Value of the Transaction
The influx of funds will provide Cronos Group with additional financial resources, product development and commercialization capabilities, which, in turn, will enable the company to compete, scale and lead the rapidly growing global cannabis industry. The additional capital will allow Cronos Group to achieve a better position to support cannabinoid innovation, create differentiated products and brands across medicinal and recreational categories, and expand its global footprint and grow its production capacity.
Moreover, Altria has decades of experience in regulatory and government affairs, compliance, product development, and brand management that Cronos Group expects to leverage, particularly with markets for cannabis opening up around the world. Cronos Group also anticipates to take advantage of Altria’s expertise to rapidly expand its offerings including its device technology.
Altria has significant expertise that can serve as building blocks for cannabis vape products. Moreover, Altria also brings considerable experience in large-scale manufacturing automation, pre-roll technology and supply-chain management.
Further, Cronos Group expects other medicinal and consumer-focused companies to invest in the company, following the investment by Altria.
On the other hand, Altria has agreed to make Cronos Group its exclusive partner for pursuing cannabis opportunities globally, under the Investor Rights Agreement
Both the companies are likely to enter into commercial support agreements, under which Altria will provide services related to marketing and brand management, government affairs, regulatory affairs and research and development.
We note that in October 2018, Canada became the first G7 country and the second country in the world to legalize cannabis sales for adult recreational use. This, in turn, should lead to many such deals for companies like Cronos Group. The cannabis space is grabbing headlines, lately. In August 2018, Constellation Brands, Inc. (STZ - Free Report) also increased its stake in Canopy Growth (CGC - Free Report) .
Cronos Group currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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