Despite record profits, tobacco giants are not doing very well these days. The product has many enemies among health professionals and regulators, and the percentage of the population that smokes cigarettes continues to drop. Even at $90 billion-plus, Big Tobacco needs new fields to conquer.
Big Tobacco mergers and acquisitions continue, of course – and these provide another bright spot. Business challenges can be alleviated, or at least lessened, via economies of scale. According to the journal Tobacco Control, M&A activity has been constant in the past 20 years and has included many of Big Tobacco’s most prominent names:
Notable mergers and acquisitions have included British American Tobacco (BAT) and Rothmans in 1999, UK-based Imperial Tobacco’s acquisition of Germany’s Reemtsma in 2002 plus Franco-Spanish Altadis and Commonwealth in the USA, both in 2007, and Japan Tobacco International’s (JTI) acquisition of Gallaher, also in 2007 (after the latter had acquired several companies itself). This market consolidation translates to a very strong international presence by a handful of companies …
In 2015, one of the very biggest tobacco mergers occurred between Reynolds and British-based Lorillard Tobacco. The marriage included a sell-off of $7.1 billion in cigarette brands to other firms to alleviate anti-trust concerns.
The industry has also been moving into the relatively healthier e-cigarette market to reshape its reputation and reposition itself in a more positive light. Big Tobacco has been at the forefront of R&D in the shift from smoking to vaporizing, and much of the technology in cannabis vaporizing is an outgrowth of Big Tobacco’s initiatives.
Big Tobacco’s growing interest in cannabis is thus not surprising, and M&A activity is sure to increase as cannabis becomes industrialized. As with the tobacco market, M&A within the cannabis market can create more dynamic and efficient business environments for the companies involved.
But, given the expensive lessons learned by the industry leadership resulting from lawsuits over smoking tobacco, Big Tobacco won’t be looking at producers of smokable cannabis as M&A targets. They’ll focus on the marketplace using a derivatives-based approach, instead, and the evolving cannabis industry will undoubtedly provide tempting targets.
Big Tobacco will likely be looking for low-cost, high-margin, environmentally friendly producers, as well as companies involved in processing extracts for medicinal or recreational use. As regulations shake out in the growing number of jurisdictions that are legalizing cannabis, those companies that employ the clean technologies involved in food- and pharmaceutical-grade processing widely recognized as acceptable in the food, drug and beverage industries will increasingly take leadership positions.
“Cannabis consumption is already worldwide,” noted Anthony Wile, investment consultant and chairman and CEO of The Wile Group, and someone with exposure to various cannabis ventures. “That means the typical market ramp-up while consumers familiarize themselves with the product is dramatically lessened to a point where one can reasonably argue that there is literally no marketing required.”
One of the areas set to make the most progress involves cultivation – cannabis agriculture – according to Wile. “As the industry matures and whitens, various industry elements will find their place from a geographical standpoint,” he said. “It will begin to occur to top people, if it hasn’t already, that they can make substantive profits by ensuring that cannabis is grown in appropriate geographical locations that offer the best results.”
Wile is referring to equatorial regions where cannabis can be grown most rapidly, and with the best quality, often in four growing cycles per year. Current cultivation in northern climes often involves expensive, environmentally unfriendly and energy-intensive indoor facilities, a situation that has been driven more by regulatory restrictions than business priorities or economic advantages.
Anthony Wile believes that growers, generally, will prove to be especially tempting M&A targets. “The cultivators should prove especially attractive to the largest tobacco giants if they’ve been placed advantageously in the right regions,” he added. “The time will come when Big Tobacco will either invest in these companies or attempt to purchase them outright. It will likely happen when the reputational risks associated with being in the cannabis industry have lowered as a result of even more widespread legalization. In effect, the speed of the whitening process will determine when Big Tobacco will move into cannabis.”
Currently, the industry remains somewhat restricted due to institutional non-acceptance. The UN’s recent general assembly special session on drugs was expected to usher in alternatives to the current criminal approach worldwide, but no consensus was achieved about how to deal with drugs, including marijuana. China and Russia especially remain oriented toward a criminal approach.
However, some countries appear to be moving ahead regardless of the international community’s consensus – or lack thereof. The Canadian and Mexican governments, for example, have announced they would pursue regulation rather than criminalization, addressing drug-related problems with a public-health treatment approach instead of incarceration. As The Huffington Post reported, “Because of UNGASS there is now a wider acceptance that the current punitive approaches to drug use aren’t working as intended.”
Meanwhile, all eyes are on the United States, where the annual market for recreational cannabis is estimated at tens of billions of dollars or more, depending on whose black-market analytics you rely on. Bloomberg recently suggested a potential $45 billion annual demand for recreational cannabis. The truth is, no one really knows how big it really is. It’s just big. And Big Tobacco knows it.
Any such future entrance into the cannabis industry by Big Tobacco likely will not happen until there has been a federal change in the US. And in the US, the more states that legalize, the more pressure there is for the federal government to do the same, leading many savvy market observers to predict that it is only a matter of time.
Anthony Wile suggests investors should “look for investment opportunities that can put you in position for potential acquisitions by large corporate interests with lots of cash looking to invest in this sector at some point. At the Wile Group we have focused our attention, for example, on investment opportunities in Colombia – a country we think will play a leading role in this rapidly whitening global industry. We continue to look at other equatorial jurisdictions, but we really do not see any others that have the vertical of climatic and economic benefits offered by Colombia.
“Simply put, the profit margins to be realized by growing cannabis in climatically advantageous environments – where the natural 12 hours of sunlight/12 hours of darkness light cycle provides substantial cost and environmental benefits – will likely be the kinds of regions that attract the long-term interest of Big Tobacco,” added Wile.