As Altria Group (NYSE:MO) focuses more narrowly on its core objective of eventually transitioning to cigarette alternatives and smokeless products, the tobacco giant is selling off its wine business for $1.2 billion in an all-cash deal with hedge fund Sycamore Partners.
Although the Ste. Michelle Wine Estates operations were comparatively small, they were profitable. Altria also has another investment gathering dust on the shelves: the $1.8 billion it sunk into marijuana producer Cronos Group (NASDAQ:CRON).
Because beverages infused with cannabidiol (CBD) are only starting to ramp up, it seems the cigarette company is missing out on a chance to have the two partners develop their own product to compete in the space.
Altria acquired Ste. Michelle as part of its acquisition of smokeless tobacco company UST in 2008 that it bought for $11.7 billion. In addition to the winery (actually a network of 18 different wineries, mostly concentrated in the Pacific Northwest), the deal also gave Altria the Copenhagen and Skoal brands, two valuable smokeless tobacco businesses.
Ste. Michelle is one of the top 10 premium producers of wine in the U.S., but vintners were generally hit hard by the pandemic last year, with global consumption falling 2.8% in 2020. Ste. Michelle’s wine shipments tumbled 12% last year to 7.3 million cases.
Some analysts believe the consumer-taste trend toward premium wines is nearing its peak, though forecasts for 2021 suggest it will continue at least through this year, if only due to delays experienced last year because of the pandemic.
Altria’s sale could be good timing from that perspective, but the company seems to be forgoing any potential for tapping into the marijuana market through alcoholic beverages.
A slow start for beverages
So far, CBD-infused beverages have not been the success they were touted as. Anheuser-Busch InBev, Constellation Brands, Heineken, Molson Coors Brewing, and other alcoholic beverage makers have invested in or partnered with marijuana companies, but sales have failed to take off. That’s true even in Canada, which is a much more mature CBD market than the U.S., relatively speaking.
Data shows that CBD beverages in Canada generated only $28 million in sales in 2020, far less than the $529 million analysts had forecast and just slightly more than 1% of the total $2.6 billion in legal marijuana sales (legal weed has its own problems due to regulations making it more expensive than illegal pot).
Yet marijuana legalization in the U.S. is still a patchwork quilt of individual state laws. Sen. Chuck Schumer, the New York Democrat, just introduced legislation to legalize it nationally, but getting the bill approved could be a tough slog. In the meantime, though, Altria could have perfected a beverage to sell. After all, investing in Cronos Group was motivated by the long-term potential of marijuana’s growth.
And that co-development would have been a good move, too, as Cronos on its own has done nothing and gone nowhere for Altria.
A drag on performance
The tobacco giant assigned a fair value on its investment in Cronos Group at the end of 2020 of $1.1 billion, down from $1.2 billion the year before and just 8% above its $1 billion carrying value on the balance sheet (it had been 20% above the carrying value in 2019).
Altria took pre-tax losses of $51 million last year on Cronos and $928 million the year before, so things are improving, but the pot stock could be doing more. Maybe now it is.
Cronos just signed a deal to acquire a 10% stake in PharmaCann, a U.S.-based cannabis operator. And with its own CBD products available for sale here, working to blend them into a Ste. Michelle beverage could have given both Cronos Group and Altria a jump-start in the space that they will need to enter eventually.
Paring down the potential
Still, woulda, coulda, shoulda. Altria is letting this prized asset go, and now investors will have to see if the tobacco giant can salvage its Juul electronic cigarette investment from total ruin and get cigarette smokers to accept Philip Morris International‘s IQOS heated tobacco device.
It’s been a slow go on both fronts, and now with the wine business sold, Altria has one less asset at its disposal.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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