Power Couple – How Cronos and Altria partnership is shaking up the industry

The sheer number of cannabis deals in the last year is staggering. During a recent CNBC seminar, one of the M&A experts counted more than 350 deals of all types, shapes, and sizes. What the total will be for 2019 is anyone's guess, but with cannabis stocks off to a strong start, it appears investors are betting there will be plenty going on in the months ahead.

There is little doubt that any will reach the absurd price levels on the deal between Cronos Group (NASDAQ:CRON) and tobacco giant Altria that was announced just a few weeks ago on December 7. Together with last April's deal between Constellation Brands and Canopy Growth (TSX:WEED) (NASDAQ:CGC) brings just over $7 billion in new capital to the legal cannabis industry. That is more than virtually all public companies were worth just two years ago.

Cronos shareholders: Time to start the party

On Friday Cronos announced the mailing of meeting materials related to its proposed deal with Atria that is scheduled to take place on February 21. What are the odds the deal is rejected by Cronos shareholders?

You have a greater chance of simultaneously being struck by lightning and winning the lottery. Here is why.

Altria is buying roundly 218 million newly issued Cronos shares. The total amount paid by Altria comes to CA$3.8 billion ($2.9 billion). There are two parts: The first is a straight purchase of 146 million Cronos shares followed by warrants to purchase another 72 million shares down the road.

Before news began to leak about discussions, the price of Cronos closed at $8.29 or a total value of $1.56 billion. Suddenly Altria offers you, the shareholder, just about twice the current price of Cronos but is asking only for 45 percent at the outset and 55 percent if the warrants are exercised.

With over 30 years on Wall Street as a deal maker, investor, and analyst, this is only the second time such irrational exuberance has taken place. The only previous took place last April when Constellation Brands ponied up $4 billion for Canopy Growth, receiving only 37 percent of the CGC equity.

For those close followers of the saga of cannabis stocks, the description of these deals is probably of little surprise. What these deals mean for investors is all good. It provides a far different metric of value as we begin 2019.

It means there is a 'For Sale' sign on virtually everyone in the business.

And there is still an ample supply of major corporations, both in the healthcare as well as the consumer products arena that are prospective buyers. In spite of their public declarations, once the dominoes start to fall, names like Coca Cola, Pepsi, and many others will be pressured into action.

So, for as long as the investment world believes there is a progressive liberalization of medical and recreational cannabis in the United States and elsewhere there is a race underway to nail down the most capacity, the most experienced talent, and the fastest track to market dominance. All of this, of course, takes capital. That means dealmakers in 2019 will be forced to apply comparative valuations like Constellation Brands and Altria paid to be in the cannabis business.

Will cannabis be the number 1 investment for 2019?

All of this is welcome news for investors. After last year when The North American Marijuana Index performed miserably — falling 46 percent —prices are off to strong start, increasing 35 percent from their Christmas Eve lows.

A buoyant market in cannabis stocks is almost destined for the months ahead. Between continuing improvement in the outlook for legalization and the premium pricing for deals, it may not be stretching reality to the possibility that cannabis stocks may end up with the best performance of any market sector this year.

An absurd notion; perhaps not.

When you consider that most popular measures of the U.S. stock market are near record high multiple of earnings while interest rates are on the rise and the economy is showing signs of slowing. With this perspective, cannabis stocks should shine.

This article first appeared in Pot Network.

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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