CRON Cronos Group Inc

Tobacco company is in talks with cannabis company and e-cig startup Juul

By Jennifer Maloney 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 5, 2018).

Marlboro maker Altria Group Inc. is eyeing cannabis and e-cigarettes, searching for growth outside its traditional business, as the long decline of U.S. cigarette sales accelerates.

The tobacco giant is in separate talks to make investments in Canadian cannabis company Cronos Group Inc. and in San Francisco e-cigarette startup Juul Labs Inc., according to Cronos and people familiar with the Juul matter. The two companies would give Altria access to new customers and overseas markets, but a deal with either isn't imminent.

Altria is the U.S. cigarette market leader, but its share of the fast-growing e-cigarette market is eclipsed by Juul, whose sales represent three-quarters of the domestic vaping industry. Cronos is the fourth most valuable publicly listed marijuana company with a total valuation of about $1.9 billion.

Talks with both companies could be derailed by the baggage that Big Tobacco brings.

Some Juul staff are upset after The Wall Street Journal reported last week that the startup is entertaining selling a significant stake to the tobacco company, a move they feel betrays Juul's stated mission of helping addicted cigarette smokers switch to less harmful products, according to current and former employees.

And Cronos might be reluctant to do a deal because it could preclude other potential partnerships the cannabis startup might forge with pharmaceutical, food or beverage companies. Cronos on Monday confirmed that it was in early discussions with Altria, noting that "there can be no assurance such discussions will lead to an investment."

Altria and Juul declined to comment Tuesday.

Toronto-based Cronos Group 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.

A deal would give Altria an opportunity to capitalize on those overseas markets, as cigarette sales slow in the U.S. But it is unlikely that the company would sell marijuana products in the U.S. before cannabis is legalized nationwide. While recreational or medical marijuana is legal in many U.S. states, it remains illegal at the federal level.

Cronos in September unveiled a research project with Boston-based Ginkgo Bioworks Inc. to study new techniques for producing medical marijuana. One process under consideration is creating CBD and other cannabinoids through a yeast fermentation process that eliminates the need to grow plants.

Cronos's stock price jumped by nearly 16% this week after Reuters reported on the Altria talks.

Closely held Juul, a three-year-old company with more than 1,000 employees, was valued at $16 billion in a funding round this summer. Juul's sales have surged over the past year, even as it contends with a crackdown by the Food and Drug Administration aimed at curbing widespread use of its products by teens.

Altria represents 46% of the U.S. market for combustible cigarettes. Its stock has declined more than 20% over the past year, as the company has been buffeted by declines in traditional smokers and a potential U.S. ban on menthols. The tobacco giant still has a market value of more than $100 billion.

The U.S. cigarette industry has for years used price increases to boost revenue and profits despite falling cigarette volumes. But that decline has sped up in recent months to a level that some analysts see as unsustainable. Altria's long-term cigarette volume forecast had been a decline of between 3% and 4%. For the year ended Nov. 17, its 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 CEO Howard Willard in October on a conference call with analysts acknowledged the sharpening decline, attributing it 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."

Mr. Willard confirmed that the company was exploring opportunities in the cannabis industry. "We acknowledge that it is currently federally illegal in the U.S., but I think we think it's worth exploring the category because that might change in the future," he said.

With these two investments, Altria could buy itself out of a bind, Cowen analyst Vivien Azer said, noting that it will become more difficult to use price increases to offset falling cigarette sales.

Altria has long had an interest in cannabis. An internal document in 1970 said that the Justice Department had asked the tobacco company to perform a chemical analysis of marijuana smoke, and the company viewed the request as an opportunity to explore a controversial product that was increasingly popular among young people.

"We are in the business of relaxing people who are tense and providing a pickup for people who are bored or depressed," the document said, explaining the decision to grant the DOJ's request. "The human needs that our product fills will not go away. Thus, the only real threat to our business is that society will find other means of satisfying these needs."

Jacquie McNish contributed to this article.

Write to Jennifer Maloney at jennifer.maloney@wsj.com

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December 05, 2018 02:47 ET (07:47 GMT)

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