Altria Group, one of the largest tobacco companies in North America, has agreed to invest 2.4 billion Canadian dollars ($1.8 billion) in Ontario-based cannabis producer Cronos Group - the most significant foray by Big Tobacco into the rapidly growing cannabis industry to date.
Altria will pay an additional $1.4 billion for warrants that, if exercised, would give Altria a 55% ownership stake in the Toronto company.
The first Canadian cannabis grower to list its shares on a USA stock market, Cronos said it plans to spend the money on product innovation, noting Altria's expertise in device technology and automation, and fuel Cronos's expansion into new countries amid a global shift toward loosening restrictions on the drug.
"Altria is the ideal partner for Cronos Group, providing the resources and expertise we need to meaningfully accelerate our strategic growth", said Cronos CEO Mike Gorenstein in a statement.
Not surprisingly, investors are cheering this game-changing partnership, bidding up Cronos's shares by as much as 38% in premarket trading today.
The agreement allows Altria to nominate four directors to Cronos' board of directors, including one independent director.
During the US midterm elections, MI became the latest state to approval the legalization of recreational cannabis and Utah and Missouri approved the drug for medical purposes.
Cronos is a leading player in Canada's cannabis industry, which received full nationwide legalization earlier this year.
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Altria's bet on Cronos could also prompt more similar deals in the sector, he added.
Cronos plans to focus on cannabis genetics, innovation and branding, while contracting with farmers to grow the product and working with retailers.
Reuters had first reported on the deal negotiations on Monday.
Altria had been assessing market opportunities in the cannabis industry since at least September.
For its initial investment, the tobacco giant will acquire a 45% ownership stake in Cronos.
Meanwhile, Molson Coors launched a joint venture called Truss with Quebec-based cannabis producer Hexo Corp.in October. It also weighed making investments in other growers, such as Aphria and CannTrust Holdings Inc., according to sources familiar with the matter who were granted anonymity because the talks were private.
Gorenstein said that 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".