How Will Tobacco Play in Cannabis? It’s common for cannabis boosters or those with an axe to grind to attack the tobacco sector. Among the criticisms, they will claim that Big Tobacco (BT) has a growth problem and is greedily targeting the cannabis industry using a variety of means. Their entry is imminent. I work with a tobacco-related enterprise, so I have a line of sight into tobacco sector strategies and results. Does the above thesis stand up to scrutiny? Kind of. My view shouldn’t surprise anyone familiar with the industry. I’m not here to promote tobacco firms, justify their sins or endorse their approach to marketing or lobbying. Rather, I will advance some sensible observations, based on facts and reality. My take - Critics will cite a few, over-hyped deals - all of which kicked off many years ago. Altria made significant investments in Cronos and JUUL. Other, smaller investments include BAT & Organigram and Imperial Tobacco & Auxly. By Fortune 500 standards, however, this a modest number of small deals. - Tobacco and cannabis have different operating systems, goals and shareholder expectations. We need to assess BT’s threat or opportunity in the context of how they think and act. Their view > BT is a small group of large, profitable, and global companies with solid balance sheets. They have the wherewithal to do whatever they want in cannabis, at a time of their choosing. > They are also not in decline when you consider the whole business. First off, there are still over 1B smokers around the world. BT’s smoke-free products are big business, enjoying double digit growth (they now represent 40% of PMI's business). JT and Altria are not far behind in this new category. > BT selectively seek out long-term investments in brands, innovation and product platforms. They want to buy or build global capabilities and proprietary IP that could be leveraged into adult use or medical cannabis. Your run of the mill cannabis business would be of little interest. > BT know what their strengths are - brand building, lobbying (or regulatory capture), distribution - and how to use them. What matters to many LPs & MSOs – scale, cultivation expertise, licenses – is not as important to BT decision making. > Existing BT cannabis deals must be contextualized. They are as much about learning our industry and creating/leveraging innovation as making money. Some takeaways 1. BT doesn’t need cannabis for growth; any move into weed will be a portfolio-driven decision. 2. BT thinks globally. They will likely buy and operate a cannabis business as a separate entity, leverage any quality IP & brands and then scale up. 3. There’s no rush. BT can wait patiently for the right acquisition or regulatory reform, especially when they have lots of cash and all MSO & LP valuations are so low.

Posted by Mitchell Osak at 2024-04-04 15:13:07 UTC