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A cannabis company partnering with Big Tobacco is like a yoga studio partnering with Big Oil.

It doesn’t look right.

Feel right.

Or smell right.

On March 08, 2019 Cronos Group (CRON.NASDAQ) announced it accepted a $2.4 billion injection from tobacco giant Altria Group (MO.NYSE), giving Altria a 45% ownership interest in Cronos.

Cronos Group controls two Canadian cannabis producers: Peace Naturals Project and Original BC. The company has a market of $6.7 billion.  Full-year revenue for 2018 was a modest $19.2 million, compared with C$1.8 million in 2017.

Prior to the Altria deal, Cronos had only $25 million Cash.  CRON is currently trading at a Forward P/E ratio of 590 – compared to an industry average of Forward P/E of 12.

Cronos is now focussed on “building an international iconic brand portfolio and developing disruptive intellectual property.”

Altria – a $91 billion tobacco giant – is the parent company of Philip Morris USA, John Middleton and U.S. Smokeless Tobacco Company. Its operating companies include MarlboroBlack & Mild and Skoal.

Cigarette smoking is responsible for more than 480,000 deaths per year in North America, including more than 41,000 deaths from second-hand smoke. That’s about 1,300 deaths per day.

In 2006, a United States federal court found that Philip Morris “disputed scientific findings linking smoking and disease knowing their assertions were false.”

The judge claimed that Altria “altered the chemical form of nicotine” to improve nicotine transfer efficiency. This was done by manipulating smoke pH with ammonia in a process called “freebasing” causing smokers to become “more addicted to the product.”  Altria was fined $10.1 billion.

More recently, the parents of a 15-year-old Florida girl have launched a class action lawsuit against Altria for marketing e-cigarettes to minors.

The plaintiffs claim their daughter has become addicted to the “sleek USB drive-looking device” that contains oil to create vapor. She “suffers from seizures – a complication of nicotine ingestion”.

Worldwide, tobacco use causes more than 7 million deaths per year.

To put it bluntly, Altria kills a lot of people.

It knows this.

It could stop.

But it continues killing people.

Because…you know…it’s profitable.

“We are delighted to close this Altria transaction and kick-off a relationship that we expect to lead to significant growth and value creation,” stated Mike Gorenstein, Crono’s CEO, in an upbeat mood on the day of the announcement.

Scrambling to rationalise the unholy partnership, Gorenstein claimed that Altria’s “regulatory expertise” will enable Cronos to “lead the rapidly growing global cannabis industry.”

“Cronos Group is our exclusive partner in the emerging global cannabis category,” confirmed Howard Willard, Altria’s CEO, “and represents an exciting new growth opportunity.”

Some outside observers felt queasy about this marriage from the get-go.

“It’s inherently tension-filled for a tobacco company to have close to a majority stake in a medical cannabis entity,” stated Rebecca Brown, founder of Crowns Consulting, “It’s going to be interesting to see how they position and package that.”

How should investors think about the Altria deal and some of the health issues the company has faced in the past,” Market Watch asked Gorenstein, “while you’re trying to build medical brands alongside recreational products”?

“Altria is very, very focused on reducing risk and expanding choice,” replied Gorenstein vaguely, “And that’s kind of the defining characteristic in the investments they’re making.”

“We’re in a position that it doesn’t hurt Altria if we put out more medical products, it doesn’t take away their existing market share”, added Gorenstein, “Same thing with recreational products; same thing with CBD products.”

This is a calorie-free and ethics-free response.

Paraphrased: it’s no problem being in bed with Big Tobacco because we don’t make tobacco products.

Gorenstein may now be casting a nervous eye in the direction of Canopy Growth’s (CGC.NYSE) partnership with Constellation Brands (Corona beer). Constellation paid $4 billion for a 38% stake in Canopy.

Canopy’s Q4, 2019 results reported a net loss of $323 million Canadian dollars.

“After the $4 billion injection from Constellation Brands, “you need to use that capital to build scale, and we did,” stated Bruce Linton, Canopy CEO on the company’s Q4, 2019 earnings call.

Mr. Linton was ousted the following week by a board of directors now jammed with Constellation management.

Following the “strategic investment”, Cronos’ board also been re-jigged to give Altria the power to fire Gorenstein.

The Cronos board of directors of added four new directors nominated by Altria:

  • Kevin Crosthwaite, Jr., Senior VP, Chief Strategist of Altria;
  • Bronwen Evans, Independent Consultant and Brand Strategist;
  • Murray Garnick, Executive VP and General Counsel of Altria; and
  • Bruce Gates, Founding Partner of Three Oaks Strategies LLC

“We are pleased to welcome these new directors to the Cronos Group Board and look forward to benefitting from their experience and expertise,” stated Mike Gorenstein seemingly unaware of the danger he is in.

The plan is that Cronos will partner with Altria on “vaporization technology”, as well as “pre-rolled cannabis products” and “working with regulatory bodies”.

If that sounds exciting to you, we’d like to recommend the director’s cut of Kevin Costner’s 1990 4-hour classic, “Dances with Wolves”.

Sample Dialogue: “Wait, wait, wait – we should tell this to Ten Beavers!”.

There is nothing identifiably “strategic” about Altria’s investment in Cronos.

Looking for a new play with a good vibe, Altria dangled $2.4 billion dollars in front of Cronos – and the hapless cannabis company bit.

According to the Center for Public Integrity, between 1998 and 2004, Altria spent $100 million lobbying the U.S government for the right to kill more people.  The U.S government counted the $100 million.  Paused dramatically. And then said, “Yes.”

I once had a bright, beguiling, belligerent girlfriend who chain-smoked Marlboros.

I’d sometimes suggest we do it “doggie-style” so I wouldn’t have to smell her cigarette breath.

I was going to share this strategy with Mr. Gorenstein.

But then I realised.

In that relationship – Cronos will be the one bent over.

Full Disclosure: Equity Guru has no commercial relationship with Cronos or Altria.

Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.

Lukas Kane

Lukas Kane is a Vancouver-based investor and writer.Previously the CEO of a North American investment news syndicate, Mr. Kane was also the Communication Director for a consortium of resource extraction companies.In the course of his career, he has toured copper mines on the Antagfonasto desert in Chile, potash projects in Saskatchewan, cannabis labs in California and clothing factories in Shenzhen, China. A rudimentary speaker of Mandarin, Mr. Kane’s passions are his family, writing and playing football (real football - with the spherical ball).

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Interesting connection that Bronwen Evans is nominated by a company like Altria. She is an executive at the private health clinic Medcan. Medcan has the following mission statement: “We believe in building healthier communities around us. We contribute meaningfully to our communities, both locally and globally. Our initiatives aspire to make our communities better, stronger and healthier.” When you dig you really get to see