The latest blockbuster investment deal in the global cannabis market is one that ties tobacco and cannabis, and the U.S. and Canada, in a paradigm shift for the industry. Altria, manufacturer of Marlboro cigarettes, announced its investment of $1.8 billion in Cronos Group, a vertically integrated Canadian cannabis ownership firm, last week. The common share transaction nets the company a 45-percent ownership stake in Cronos.
The deal follows beverage manufacturer Constellation Brands’ $3.8-billion investment in Canopy Growth Corp., another milestone cannabis deal.
Rachel Gillette, partner and chair of the Cannabis Law Practice group at Greenspoon Marder, and Sander Zagzebski, partner of Greenspoon Marder’s Corporate and Business Practice group, explain how the terms of this long-range deal will impact the development of the global cannabis market.
“We’ve all understood that it’s a likely pivot into cannabis for tobacco,” Gillette says. “People have been talking about that for years.”
“The Constellation Brands and Altria deals are very significant, Wall Street-flavored transactions."
- Sander Zagzebski
With the announcement, Cronos Group CEO Mike Gorenstein focused his hopes for his company: “Altria has decades of experience in regulatory, government affairs, compliance, product development and brand management that we expect to leverage, particularly as new markets for cannabis open around the world." As Canada’s adult-use cannabis market continues to develop (since its so-called Opening Day on Oct. 17 of this year), Cronos Group will have a boatload of new capital with which to work—and a surge in valuation. Across the border, Altria, as a corporation, will have the capability to prepare itself for however cannabis legalization unfolds in the U.S.
Included in the deal are a set of options that will allow Altria, if it so chooses, to purchase additional equity in Cronos Group at $19 per share. Those options, called “warrants” in the acquisition space, signal a long-term perspective on this deal.
Zagzebski says that those terms track with the ballooning valuations in the cannabis market. They’re a way for companies to get a foot in the door of a growth-oriented cannabis company while also waiting to make a bolder investment.
“It’s very clearly a strategic move,” he says. “[Altria is] coming in as a major, major minority investor with a whole lot of what you might call ‘negative control.’ In other words, the companies aren’t going to be able to do a whole lot of stuff without their 45-percent owner thinking it’s OK. But then that 45-percent owner also has the right—pre-negotiated—to invest more money to gain absolute voting control of the company.”
If fully exercised, those warrants would ultimately provide Cronos Group with an additional $1.05 billion and Altria with a 55-percent, controlling ownership stake.
“They didn’t just invest this money at this high valuation hoping to make a return,” Zagzebski says. “They’ve invested it thinking thatthey’ve picked out what they think is going to be their first partner strategically in the cannabis field.”
With cannabis still considered an illegal, Schedule-I substance in the U.S.—but with plenty of signs pointing to a slow march toward federal reform—major consumer packaged goods (CPG) corporations have been making early moves to partner with companies now operating under the fully legal auspices of Canada’s regulated cannabis market, like Cronos Group and Canopy Growth Corp. In the case of the Altria-Cronos deal, the way that both countries’ cannabis policies play out is integral to the future of this investment. Hence the warrants.
“Because the industry is so regulated, there are some unusual circumstances and unusual deals that are out there – things that you would normally do in normal business transactions, you might have to adjust simply because of the regulatory environment that this deal is getting placed in,” Gillette says.
More and more, the fragmented cannabis marketplace is coming together through interstate and international deals. While they’re not always on the scale of the Altria investment, cannabis mergers and acquisitions are navigating those regulatory waters by keeping compliance at the forefront of their investments and taking a more forward-looking stance toward those transactions.
As the industry rapidly matures, so too does the tenor of its corporate deal-making.
“The Constellation Brands and Altria deals are very significant, Wall Street-flavored transactions,” Zagzebski says. “We’ve certainly seen those in a lot of other industries, but in cannabis what’s very interesting is: Rewind a couple years, and the deals were fairly short-form and they would not have included things like warrants and other moving parts along those lines.”
In the short-term view, the deal ramps up industry chatter over which tobacco companies will follow suit and invest in a potential cannabis partner. But in the long-term view, transactions like this one are the sort of market-moving events that can lean on the public sector and cause political reforms to move quickly through the halls of government.
“There are going to be people who are speaking more loudly to Congress members about creating a better environment for these businesses to do business in,” Gillette says. “You can’t do business efficiently when you’re under the thumb of federal illegality.”