December 10, 2018

Breakingviews: Cannabis starts to copy tech’s Indian rope trick

by Breakingviews.

Silicon Valley startups sometimes talk about the “SoftBank effect.” It’s what happens when the Japanese tech group or its giant venture fund approaches a company looking to invest some of its nearly $100 billion war chest. Whoever takes the money has the means to grind their rivals into the dust, but with the pressure that comes from having to justify a generous valuation. The same thing looks to be happening in another fast-growing industry: cannabis.

U.S. Marlboro maker Altria said on Friday that it will invest $1.8 billion – a 41.5 percent premium – for a 45 percent stake in Cronos, a Canadian pot grower. The price is high on the face of it. Before the deal, Cronos was worth about 20 times next year’s sales, according to I/B/E/S estimates from Refinitiv. That’s not really the point though. Altria has years of experience in peddling habit-forming consumer products in heavily regulated markets – and lawyers aplenty to defend itself when legal troubles arise, as they certainly will in the cannabis industry.

It’s possible to overstate the benefits of the partnership. Altria doesn’t currently grow weed – and it doesn’t even grow its own tobacco. In Canada, where marijuana is federally legal, the drug is partly regulated like traditional smokes, with strict marketing limitations. But many companies are betting it will be consumed more like alcohol, in which Altria is less of an expert. And Cronos is taking a risk by emphasizing the ways in which pot is aligned with cigarettes, a product that has killed millions, and an industry that many investors shun altogether.

Nonetheless, turning Altria down would have been risky too. The backing of a $100 billion consumer-goods group raises the chances that Cronos can survive a future shakeout among the dozens of listed Canadian companies. Altria’s willingness to pay a high price could become self-fulfilling. A similar logic has propelled the $10 billion valuation of Canopy Growth, after Modelo brewer Constellation Brands agreed to invest $4 billion in August. As in Silicon Valley, the likely winner at the end of the day is whoever holds the cash.


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