Tobacco giant Altria Group Inc. on Dec. 7 gave the clearest indication of the industry's future direction with two major announcements.
The Marlboro-maker agreed to pay $1.8 billion for a 45% stake in Canadian cannabis producer Cronos Group Inc. The deal, which also gives Altria the option to increase its position to 55%, is the first major instance of a tobacco company investing in a marijuana business.
The same day, Altria said it would stop selling its Green Smoke and MarkTen e-cigarettes amid reports that it is eyeing an investment in Juul Labs Inc., the market leader in that space. Juul has drawn the ire of the FDA for its marketing practices. In November, Juul said it would restrict online sales and shut down some of its social media feeds in an attempt to prevent its products from ending up in the hands of minors, just days before the FDA announced it would seek to ban menthol cigarettes and limit e-cigarette sales.
The combination of the spreading legalization of cannabis and the regulatory crackdown on e-cigarettes looks set to drive a wave of M&A as tobacco companies reshape their portfolios. To further complicate matters, they are likely to face competition from food and drink producers as demand for and availability of edible and drinkable marijuana products grows, as Constellation Brands Inc.'s C$5 billion investment in Canopy Growth Corp. shows.
"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," Canaccord Genuity analysts told S&P Global Market Intelligence with regard to the Cronos deal. Investment bankers would do well to pay close attention to this space.
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Consumer Edge is a weekly collection of critical developments across the automotive; retail; and food, beverage, and tobacco industries that draws on exclusive analysis and value-added content from the Consumer News team at S&P Global Market Intelligence.