You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015.
It’s been a very tough year for the Canadian LPs, and the earnings report from Canopy Growth on Friday certainly reinforced the notion that the Canadian market remains challenging for its largest players.
With sentiment perhaps as low as it can be, we think a big M&A deal could be in the works, with Altria potentially buying the remaining shares outstanding of Cronos Group.
The deal, which closed in March of 2019, infused the company with approximately US$1.8 billion, with Altria paying C$16.25 , a price that was characterized as a 41.5% premium to the 10-day volume-weighted average price as of November 30, 2018.
With a quarter remaining in 2021, Altria is expected to generate revenue of $21.6 billion, up just 4% from a year ago.
Cronos Group has pursued an investment into cannabinoids produced by yeast fermentation and has been focused on markets outside of Canada, particularly Israel and the U.S., where it has CBD operations as well as a recent investment in an option to acquire a minority stake in MSO PharmaCann.
In fact, the $2 billion required to buy the remaining shares of Cronos at $9.25 would be $2 billion, which is less than the cash balance at Altria as of 9/30.
Because Altria owns less than half of Cronos Group, it doesn’t consolidate the results in its financials.
With the stock price low, especially in light of a still tremendous cash balance relative to the market cap, buying Cronos is less about near-term financial benefits for Altria than doubling down on its strategic vision.
Cronos Group is a large accelerated filer with the SEC, which means its Q3 financials are due on Tuesday, November 9th.
We know we are going out on a limb here with a very speculative call and recognize that we could be wrong about the reason for no conference call announcement.
To date, the cannabis sales have been modest, but data from Hifyre showed very strong sales during Q3 at the retail stores, with sequential growth of 48% far outpacing the market growth of 9% during the quarter.
Similar to peers, the company is burning cash, but with its stronger balance sheet and improving market share, this should diminish over the next few years, especially if its biosynthesis efforts pay off.
If Altria buys Cronos, we believe it could accelerate the company’s efforts to make legally compliant investments into the American cannabis industry and inspire others to potentially do so as well.
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