Cronos Group Benefits From The Altria Deal In Multiple Ways

+4.73%
Upside
43.66
Market
45.73
Trefis
MO: Altria Group logo
MO
Altria Group

Earlier this month, tobacco major Altria indicated that it would pay about $1.8 billion for a 45% stake in Canadian marijuana company Cronos Group. Altria also has an option to take a majority interest in Cronos in the future. While the deal could help Altria diversify beyond the declining cigarette market, it could prove significantly beneficial to Cronos from both a financial and strategic perspective.

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Cash Infusion Helps Cronos Accelerate Capacity Expansion And Projects

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With the substantial proceeds from the investment, Cronos will have a significant amount of cash to expand its production and distribution footprint. While the company has taken steps to increase its manufacturing capacity (which stood at just about 6,650 kilograms as of the last quarter), constructing new facilities in Canada and overseas via joint ventures, the cash infusion could allow it to double down on the construction of greenhouses and processing facilities. Cronos is also likely to bolster its R&D spending, allowing it to speed up projects such as its development of cultured cannabinoids. Cronos may also be well-positioned to scale up the production of lucrative cannabis oils and extracts, which require significant capital and technology-related investments due to their complex extraction process.

Plenty of Strategic Benefits

There are likely to be multiple strategic benefits as well.  With the market for recreational marijuana opening up in many parts of the world, Cronos could leverage Altria’s international reach to expand its business. Altria also has extensive experience on the regulatory front, and this could prove advantageous for Cronos as the nascent cannabis industry scales up. Moreover, Cronos has indicated that Altria could help it turn marijuana into a more standardized consumer product. While Cronos could develop the basic marijuana product, Altria’s experience and scale could help the company deliver consistent results. There could also be some specific areas where Cronos could leverage Altria’s product development know-how, such as vaporization technology.

 

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