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Tobacco Giant Investing in Cannabis

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Tobacco Giant Investing in Cannabis

We’re all familiar with the iconic Marlboro Man – is he soon to become the Cannabis Man? Richmond, Virginia-based Altria - the parent company of Philip Morris, maker of Marlboro cigarettes - recently bought 45 percent of Cronos Group, to the tune of $2.4 billion.

Cronos Group, a Canadian medical and recreational marijuana company based in Toronto, will soon receive another $1.4 billion in warrants from Altria. If Altria exercises these warrants, its stake in Cronos Group will grow to 55 percent. The deal allows Altria to own Cronos Group in full if it makes that decision down the road.

Vaporization and Other Technology

Mike Gorenstein, CEO of Cronos Group, says that Altria is not looking for a business hedge with its Cronos investment, as its tobacco business is “adjacent” to cannabis, not directly competitive. According to Gorenstein, opportunities exist for the cannabis company to work with the tobacco giant on vaporization technology.

Pre-rolled cannabis is another area in which Altria may aid Cronos Group, as it’s a product almost certainly headed for extensive demand. Gorenstein says Altria can help Cronos in turning cannabis into a standard consumer product. When customers purchase Marlboro cigarettes, they know what they’re getting.

Marlboro smokers don’t confuse the taste and smell of their brand with rivals Camel or Newport, and Gorenstein envisions the same standardization with cannabis, so consumers know exactly what to expect with a Cronos Group joint.

When it comes to market share, Marlboro has no real competitors. It’s consistently the top-selling cigarette brand in the U.S., its sales greater than its next seven competitors combined. That’s according to the CDC, obviously no fan of Big Tobacco.

In 2017, Marlboro’s market share was a whopping 40 percent, with Newport in second place at just 14 percent. That marketing, supply chain and regulatory expertise should serve Cronos Group well.

When it comes to e-cigarettes, the market is in trouble. The FDA has cracked down on these products, imposing serious restrictions on their sale due to a spike in the number of teen users. In October, Altria stopped selling e-cigarette pods and removed most of its flavored products from the shelves, costing the company approximately $200 million.

In a statement, Howard Willard, Altria Chairman and CEO, said the company “does not see a path to leadership” with e-cigarettes, and believes it is time “to refocus our resources.” Since the FDA is proposed a menthol cigarette ban, which would greatly affect the company, it seems natural that Altria’s refocus might include cannabis.

While still federally illegal, Altria’s statement concerning its stake in the Cronos Group notes that global cannabis “is poised for rapid growth over the next decade.”

The Downside

There is a downside to the Altria/Cronos Group deal, and that’s the nature of the two primary products. Possibly millions of people have died or suffered serious health problems from smoking Marlboros through the decades.

Cronos is heavily involved in the medical marijuana industry, and trying to promote the health benefits of medical marijuana when so closely associated with Big Tobacco may prove difficult. Cannabis consumers, whether medical or recreational, may not want to purchase product from a company in which Big Tobacco owns such a large stake.

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David Kani

David Kani is a Newport Beach, California based business lawyer with a focus on cannabis companies, their investors, employees and cannabis-related litigation.
To connect with David: [hidden email] or 714-907-0697.

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