CRON Cronos Group Inc

By Jennifer Maloney and Allison Prang 

Faced with a slump in cigarette sales and the threat of new federal regulations, Altria Group Inc. is placing some big bets as it searches for growth beyond its dominant Marlboro brand.

On Friday, the biggest U.S. tobacco company said it would invest $1.8 billion in a Canadian marijuana grower, pushing into a nascent business that is illegal on the federal level in the U.S. but could unlock international markets.

At the same time, Altria said it would discontinue its e-cigarette products, alternatives to its familiar Marlboro, Virginia Slims and Parliament cigarettes. Altria has been developing and marketing e-cigarettes for years but failed to find much traction with consumers.

But the tobacco company isn't giving up on the vaping business that threatens to undermine its roughly $20 billion in annual cigarette revenue. Altria is in discussions to invest billions of dollars to take a significant stake in Juul Labs Inc., a controversial but fast-growing e-cigarette startup, according to people familiar with the matter.

Although Altria dominates U.S. cigarette sales with 46% of the market, the company is under pressure to shift strategies because of the decline in adult smokers and a proposed U.S. ban on menthol-flavored cigarettes. Shares of the Richmond, Va., company have declined more than 20% this year.

For years, Altria and its U.S. rivals have been able to raise prices to boost profits despite falling cigarette volumes. But the surge in e-cigarette sales over the past year threatens to further shrink the pool of adult smokers and undercut cigarette pricing. For the year ended Nov. 17, Altria's cigarette volumes fell 4.5%, a rate that has steepened to 7.6% in the most recent four weeks, according to a Wells Fargo analysis of Nielsen data.

Altria's long-term cigarette volume forecast had been a decline of between 3% and 4%. The company's CEO, Howard Willard, in an October conference call attributed the accelerated decline to higher gas prices, which reduce discretionary spending, and the growing popularity of e-cigarettes.

"It's hard to tell how long it's going to persist," he said of the slide. "I think we're going to have to wait and see what happens with both gas prices...and whether or not the growth rate of e-vapor slows down."

A significant investment in Juul, which has captured roughly three-quarters of the U.S. e-cigarette market, would be one way to combat the problem. It would come at a steep price: The startup, which has roughly $2 billion in annual sales, was valued at $16 billion in a funding round over the summer.

Altria's own e-cigarettes, sold under the MarkTen and Green Smoke brands, had captured just a small slice of the market. On Friday, the company said it would take a $200 million charge to discontinue that business and its Verve nicotine gum.

"We do not see a path to leadership with these particular products and believe that now is the time to refocus our resources," Mr. Willard said in a news release, adding that the company is still committed to e-cigarettes and other cigarette alternatives.

Altria is waiting for Food and Drug Administration approval of a heat-not-burn tobacco product called IQOS, which it hopes to market in the U.S. in a partnership with Philip Morris International. The companies say the device is less harmful than cigarettes.

Mr. Willard, a 26-year company veteran, took over as Altria's chairman and CEO in May. He played key roles in the company's 2009 acquisition of smokeless tobacco company UST Inc. and its 2007 acquisition of cigar maker John Middleton.

Altria's discussions with Juul have met resistance within the San Francisco startup, which pitches itself as an alternative to big tobacco but which has come under fire for the popularity of its fruit-flavored products among teens. In response to a surge in underage use, the FDA recently announced sharp restrictions on retail sales of such products.

At Juul, some employees are concerned about a partnership with a cigarette maker. At an all-hands meeting on Wednesday, employees asked Juul's CEO about the discussions, which were reported by The Wall Street Journal last week. He said Juul wouldn't do a deal that didn't align with its mission of helping adult cigarette smokers switch to less-harmful products.

In the meantime, Altria agreed Friday to pay $1.8 billion for a 45% stake in Canadian cannabis company Cronos Group Inc. Toronto-based Cronos grows and sells medical and recreational marijuana products in Canada, with smaller medical growing and distribution operations in such countries as Germany and Australia.

Canada legalized recreational pot sales in October and a number of other countries have legalized medical marijuana sales. In the U.S., recreational marijuana is legal in 10 states and medical marijuana is legal in more than 30.

Altria said the cannabis industry "is poised for rapid growth over the next decade" and called cannabis "an adjacent category" for its tobacco operations. Cronos had just US$7.5 million in revenue for the nine months ended Sept. 30.

It is one of several Canadian marijuana growers to attract a big investment from established U.S. companies. In August, Corona brewer Constellation Brands Inc. invested $4 billion to expand its stake in Canopy Growth Inc., which is developing both medical and recreational products.

Altria is paying C$16.25 for each Cronos share, a 40% roughly premium to where the stock was trading last week. Altria has a warrant to buy more Cronos shares at C$19 a share that would give it control of the company with a total stake of 55%. Cronos's board will be expanded from five directors to seven and Altria will get to nominate four directors.

Write to Jennifer Maloney at jennifer.maloney@wsj.com and Allison Prang at allison.prang@wsj.com

(END) Dow Jones Newswires

December 07, 2018 11:44 ET (16:44 GMT)

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