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3 Reasons For A Big “Tobacco-Marijuana Wedding” Soon

Europe 3 Reasons For A Big Tobacco-Marijuana Wedding Soon
SEP 18, 2018 LISTEN

The "green leaf" is in full swing
The "green onslaught" is in full swing. In less than six weeks, recreational marijuana in Canada will be completely legal. Apart from being the first developed country and the second largest country in the world to boast the proverbial green flag for cannabis for adult consumption, this step could well exceed $ 5bn once the industry has gotten off to a good start Generate dollars a year in sales.

The number of acquisitions and partnerships is increasing as legalization approaches

The legalization of cannabis in Canada has also triggered many negotiation efforts both inside and outside the cannabis industry. The lead company Aurora Cannabis, which is expected to deliver 570,000 kilograms a year, acquired "CanniMed" Therapeutics for $ 852 million and "MedReleaf" in Ontario for approximately $ 2.5 billion.

But it's the outside of the industry that attracts investors' attention. Last month, we experienced two major partnerships between the alcohol and cannabis industries. On August 1, Molson Coors Brewing announced the formation of a joint venture with HEXO Corp (formerly known as Hydropothecary Corp) to develop non-alcoholic, cannabis-added beverages. Interestingly, fortified drinks will not be legal on October 17, although it is expected that the Canadian parliament will discuss it and probably expand the list of products that will be legal next year.

Even bigger headlines were the $ 3.8 billion investment made by Constellation Brands in “Canopy Growth Corp.”, up 51% on the closing price of August 14. This was the third time that the manufacturer had invested in Canopy Growth behind the beer brands Corona and Modelo. In addition to pure product innovation, Constellation should be able to offer Canopy Growth its marketing expertise and expansion expertise, while Canopy can share its insight into the cannabis industry with Constellation Brands.

A tobacco marijuana wedding seems inevitable

While most investors are wondering which alcohol companies might be next, rumours suggest that Diageo is looking for a cannabis partner, they may overlook the next logical entry into the cannabis business: the tobacco industry.

Here are three reasons why a tobacco-marijuana partnership seems inevitable.

1. Key figures are declining in developed markets

The biggest incentive for the tobacco industry to seek partnership or investment in the marijuana industry is the decline in consumption and transport volumes in developed markets. In the US, the proportion of adults who smoke cigarettes has fallen from around 42% in the mid-1960s to only 15.5% from 2016 onwards. The industry is also facing marketing, advertising and brand restrictions in major industrial markets around the world.

For example, “Altria”, which is primarily known in the US for the premium brand Marlboro, recorded a decline in sales of smokable products by 6.3% in the second quarter of 2018 and by 3.7% in the first half of the year. Overall, Altria's US shipment of smokable products dropped 10.8%.

Philip Morris International, which operates in more than 180 countries around the world, excluding the US, saw a 1.5% decline in total cigarette shipments in the second quarter and 3.3% in the first half. With the exception of the Fortune and Dji Sam Soe brands, every other brand of cigarettes experienced a volume decline in the first half of 2018.

2. The tobacco industry has more than enough capital

Another good reason to believe that a deal between tobacco and the cannabis industry should come about is that the tobacco industry has more than enough cash and operational cash flow for it.

Despite the fact that the volume of Altria and Philip Morris is steadily declining, both tobacco companies have an incredible pricing power due to their dependence on nicotine. For example, while Philip Morris saw a 3.3% decline in cigarette deliveries in the first half of the year, the company still managed to increase sales by 8.3%, excluding the benefit of currency effects. Passing on price increases to consumers has long been a means of increasing sales and returns for tobacco companies.

But the tobacco industry must also be innovative and find new ways to grow. As far as I can remember, Altria and Philip Morris have paid huge dividends to win over long-term investors. And yet, these companies still generate a high annual operating cash flow. Altria has averaged approximately $ 5 billion a year over the last five years, with Philip Morris generating nearly $ 8.5 billion over the same period. That's more than enough to divert some of that cash flow into an investment or joint venture in the cannabis industry.

3. It is a logical product development
Finally, a partnership between the tobacco industry and the marijuana industry would be a logical evolution of where the tobacco industry is already heading.

Earlier this decade, the introduction of electronic cigarettes was on everyone's lips. Tabacco heaters, such as Philip Morris' iQOS device, have recently attracted attention. The point is that the tobacco industry has been working for years to reduce reliance on traditional dried tobacco, and what the cannabis industry is trying to achieve would be complementary to the aspirations of the tobacco industry.

Let's say the federal government approves new forms of consumption beyond dried cannabis and cannabis oils in 2019. Then cannabis cartridges could have been used in existing devices or maybe even in tobacco heaters. It would be a relatively seamless transition for both the tobacco and cannabis industries and should be beneficial to both.

And the winner is … ?
So, what lucky marijuana share will partner with the tobacco industry? Nobody can answer for sure, but I would guess that “Aphria” has the best cards for two reasons.

First, it's about the market and existing deals. Some colleagues from Aphria like Canopy Growth have already signed an important partnership. Although it is not excluded that Canopy Growth will find new partners away from Constellation Brands, Canopy will first focus on this business and expand its international infrastructure.

Aphria, on the other hand, does not yet have large partners and, unlike Aurora cannabis, does not target the medical cannabis market, and that should appeal to the tobacco industry. With an annual peak production of 255,000 kilograms and a distribution channel to a dozen countries, Aphria also meets many requirements that would make the company an attractive partner to the tobacco industry.

The second reason is that Aphria already has cartridges with Tetrahydrocannabinol (THC) varieties Sativa and Indica, and a combination of THC and Cannabidiol (CBD) on the market in Florida. There would be virtually no delay in implementing this innovation if Aphria worked with the tobacco industry.

In short, the tobacco industry is aggressively looking for deals with cannabis companies (possibly Aphria) in the not too distant future.

Francis Tawiah (Duisburg - Germany)

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