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Alex Kimani

Alex Kimani

Writer, Divergente Research LLC

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Divergente Research LLC and Safehaven.com. 

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This Week’s Major Pot Sector Shake-Ups

MJ

2018 has been a hotbed of activity for the marijuana industry, with a wave of consolidations, mergers and investments acting as a nice validation. But one trend has been conspicuous by its absence: big corporations outside the alcohol industry seeking tie-ups with cannabis companies.

But that might be about to change, with big tobacco now warming up to big pot. News has emerged that tobacco company Altria Group Inc. (NYSE:MO) is in talks with Cronos Group (NASDAQ:CRON) to acquire the Canadian cannabis producer, according to a Reuters report.

People familiar with the matter told Reuters that a deal could close in a matter of weeks.

Altria is a $102B (market cap) diversified tobacco giant that owns the famous Marlboro brand and several cigarette companies, including Philip Morris USA and Nat Sherman, while Cronos is a former OTC-listed Canadian pot company that uplisted to the Nasdaq exchange earlier in the year.

Altria and Cronos win…

(Click to enlarge)

The news has sent Cronos shares soaring 11 percent on Monday and another six percent by 1pm ET on Tuesday, thus giving the company a valuation of more than $2B.

Cronos has been one of the biggest gainers during the latest wave of marijuana legalization, with the shares now up a staggering 4,383 percent over the past three years.

(Click to enlarge)

Interestingly, Altria shares have also gained slightly--up 1.6 percent on the day--signaling that investors probably see the potential merger as a way for the company to pivot into the fast-growing legal marijuana industry.

Altria shares are still down 22.3 percent in the year-to-date as the company continues to grapple with the industrywide trend of shrinking cigarette sales due to a more health-conscious younger populace. Related: Traders Euphoric After “Extraordinary” G20 Meeting

Altria is also reportedly eyeing a stake in San Francisco-based e-cigarette startup, Juul Labs, with a valuation of $15B to counter these headwinds.

Legal pot sales in the U.S. are expected to double in 2018 to hit $20B while total demand (legal and black market) is estimated at $52.5B annually. Meanwhile,  the e-cigarette industry is projected to grow to $6.6B this year.

while Aphria gets slammed

(Click to enlarge)

For another significant industry first, the reaction from pot stocks has been strangely muted with some of the sector’s biggest names engaging the reverse gear.

Yet, no pot stock has had it as bad as Ontario-based medical cannabis player Aphria Inc. (NYSE:APHA) which has been hammered to the tune of 40+ percent.

Aphria’s bloodbath has been triggered by the fact that the company was at one time in Altria’s M&A crosshairs, but now might have to look for another suitor elsewhere.

The final straw, however, came after Quintessential Capital Management founder Gabriel Greg unleashed a scathing attack on Aphria, labeling the company “a black hole whose half of its net assets have been diverted to be used for inflated investments that are held by insiders at the company”.

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The damning report is one the SEC might want to investigate since Greg claimed that Aphria’s insiders had used assets from retail shareholders to purchase worthless overseas companies at inflated prices.

Aphria has defended itself against the allegations by assuring investors that it’s preparing a comprehensive report that will put the record straight and also vowed to take legal action against Quintessential Capital for the “false and defamatory” claims.

Other pot stocks were caught in the crossfire.

Aurora Cannabis (NYSE:ACB) has dipped 4.7 percent even after the company announced that it had kicked off shipments of cannabis soft gel capsules to Canada's recreational and medical marijuana markets. Ironically, retailers in the country almost ran out of stocks when weed was legalized in October. Canopy Growth (NYSE:CGC) is down 4.9 percent, while Tilray Inc. (NASDAQ:TLRY) has slipped 1.6 percent indicating a general bearish atmosphere across the industry.

By Alex Kimani for Safehaven.com

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