Marlboro man smokes out growth through $1.9bn cannabis deal
Sky's Ian King says Altria's stake in Cronos makes it the first of the big tobacco firms to diversify in the cannabis market.
Friday 7 December 2018 18:20, UK
It's the question the chief executive of every big tobacco company has been asked since time immemorial: if cannabis were regulated, would you sell it?
The usual response is the one that Alison Cooper, chief executive of Imperial Brands, the world's third-largest player by sales, gave to Sky News recently, which is that no decision has yet been taken.
Today, though, the world number four by sales, Altria Group, has gone into the pot market in a big way.
The company which sells the Marlboro, Benson & Hedges and Virginia Slims brands in the United States has agreed to pay $1.86bn for a 45% stake in Cronos, one of a number of marijuana producers to have listed on the Canadian stock market following the country's decision to legalise recreational use of the drug, which came into effect in October.
It makes Altria the first of the world's big five tobacco companies - Philip Morris, British American Tobacco, Imps and Japan Tobacco are the others - to dip a toe into the market.
The surprise is that it has taken any of the quintet this long.
The drinks industry has been far quicker off the mark in this respect, with the Johnnie Walker, Guinness and Gordon's gin maker Diageo reported in the summer to be in "serious discussions" with producers about making a range of cannabis-infused drinks.
Canadian-US brewer Molson-Coors announced last month that it had set up a joint venture with Canadian firm Hydropothecary Corporation to this end.
And Constellation Brands, the US company behind Corona lager and Paul Masson brandy, has spent just over $4bn on a 38% stake in Canopy Growth, another Canadian pot company.
Coca-Cola has also said it is looking into the possibility of producing cannabis-infused drinks.
Yet diversifying into cannabis is a logical move, particularly for Altria, which has a 46% share of the US market.
That market is seeing a faster rate of decline than any other developed market in the world, with now barely one in seven Americans now smoking, lower than most other developed economies.
Moreover, now that Canada and 10 US states have legalised recreational use of cannabis, it is likely other states will follow.
It makes sense for Big Tobacco, with its mature and developed distribution networks, to move into this space and particularly in view of the fact that it is yet to see much of a financial return on alternatives to traditional smoking, such as e-cigarettes and vaping products, despite having invested billions of dollars in them.
Take-up of these products is, however, increasing rapidly.
Meanwhile, few industries on earth are as experienced as negotiating with regulators and watchdogs than Big Tobacco, making it well-placed to launch mass-market cannabis products if given the go-ahead.
There is plenty for governments such as the United States and the United Kingdom to like about legalising cannabis use for recreational purposes: once legal, the product can be regulated and taxed.
Although revenues from tobacco duty in the UK have been falling since they peaked in the 2012-13 tax year, the taxman will still rake in almost £9bn from smokers this year.
Around 6% of the UK population is estimated to use cannabis recreationally, compared with just under 15% of the adult population which smokes, so it is easy to see how legalising and taxing cannabis could bring in several billion pounds a year for the Treasury.
Legalisation also provides the ability to regulate quality and take away the risk of users becoming addicted to the dangerous, mind-bending varieties of high-strength 'skunk' cannabis.
Accordingly, it makes sense for Big Tobacco to invest in this field.
Altria's investment in Cronos will bring respectability to the cannabis sector.
The 'pot stocks' listed in Canada have been volatile investments, to say the least, with a lot of experienced investors sticking clear of it.
The sector has shown a marked resemblance to the early days of the tech bubble at the end of the 1990s, with sharp increases in the share prices of some of these invariably stocks being followed by sharp declines, but Altria's arrival points to it doing mainstream and especially if some of the other big players follow suit.
That resemblance also includes the outlandish valuations being applied to companies that in many cases are barely profitable.
There are, though, a couple of reasons to be hesitant. A lot of executives detect the tobacco industry is reaching a tipping point for alternative products like e-cigarettes and vaping products.
They may conclude the industry is better off continuing its investment in those lines rather than risk over-paying for cannabis companies - particularly when there is a growing body of evidence to suggest that the brewing sector is far more exposed to its consumers switching to cannabis use than the tobacco companies are.
At the same time, the cannabis companies themselves may want to fight shy of embracing Big Tobacco too much, other than for financial reasons.
They have spent years arguing for legalisation but, in the main, on medicinal grounds. The last thing many of them want is to be taxed and regulated as aggressively as tobacco has been - or, in time, for their consumers to be regarded as anti-social.