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Part of cannabis and small business and retail

Available now: Cannabis Professional, the authoritative e-mail newsletter tailored specifically for professionals in the rapidly evolving cannabis industry. Subscribe now.

U.S. tobacco giant Altria Group Inc. is in talks to acquire an equity stake in Canadian cannabis grower Aphria Inc., multiple sources say.

Details of Altria’s proposed investment in Aphria are still being finalized, said the sources, who were granted anonymity because they were not authorized to speak publicly about the talks.

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The sources cautioned that it could take time for the two companies to strike a deal and that talks could still fall through.

With a market capitalization of US$119-billion, Virginia-based Altria makes tobacco, cigars and wine. It owns Philip Morris USA, the maker of Marlboro cigarettes, and has a significant stake in Anheuser-Busch InBev SA/NV, the world’s largest brewing company.

Meanwhile, Aphria’s market value on Wednesday was $5-billion. Its stock price has doubled since mid-August and was trading at $20.06, up more than 15 per cent on Wednesday after The Globe and Mail published an earlier version of this story online. Its market cap rose about $700-million in the afternoon.

Altria executives have met with Aphria’s leadership team in Leamington on several occasions, the sources said. The most recent in-person discussions took place on Monday, with senior representatives at Altria making the trip from the United States.

Altria spokesman Steven Callahan declined to comment.

Aphria didn’t respond to The Globe’s request for comment, but published a press release later in the day at the request of market regulator Investment Industry Regulatory Organization of Canada.

“While Aphria engages in discussions with potential strategic partners and/or investors from time to time, the company notes that there is no agreement, understanding or arrangement in place with a potential investor at this time,” Aphria said in its statement.

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Big consumer companies are increasingly looking to forge alliances with cannabis growers, which is helping fuel a buying frenzy and driving stock prices higher as Canada prepares for the legalization of recreational marijuana next Wednesday.

Global alcohol giant Constellation Brands Inc. unveiled its plan to boost its stake in Canopy Growth Corp. to a majority position in August after having initially taken a 10-per-cent stake last fall. Molson Coors Brewing Co. has also moved into the cannabis space through a joint venture announced this summer with Quebec-based grower Hexo Corp. Other beverage makers, such as AB InBev, Pernod Ricard SA, Heineken Holding NV, Coca-Cola Co. and Diageo PLC, are among the firms that have been making the rounds with legal cannabis producers, sources have previously told The Globe.

Sources said Altria is pursuing a Constellation-style deal rather than a joint venture in the mould of Molson-Hexo.

Aphria is known for being a low-cost cultivator of marijuana, boasting a cash cost a gram of less than $1. Its production site has been a magnet for corporate visitors who are checking out the cannabis grower, with Aphria hosting tours for a number of beverage and consumer goods companies that want to learn about the cannabis business.

Diageo is among companies that Aphria has talked to recently, sources said. And to underline the interest, Aphria is nominating to its board of directors at its annual meeting on Nov. 2 Tom Looney, the recently retired president of Diageo U.S. spirits and Canada. As well, Aphria’s chief commercial officer, Jakob Ripshtein, is former chief financial officer of Diageo North America and former president of Diageo Canada.

A Diageo spokesperson said it doesn’t comment on speculation, but said “we are monitoring this space closely.”

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Meanwhile, Aphria is preparing to seek a listing on the New York Stock Exchange, sources said. As a result, it is adding new independent directors, including Mr. Looney, and expanding its board to nine directors from seven, according to the prospectus for the annual meeting.

Senior executives at Aphria made headlines in March when they didn’t initially disclose that they were personally invested in a company they acquired named Nuuvera Inc. After stories by The Globe, Aphria took steps to improve its corporate governance by adopting a formal policy for how company insiders can invest in other cannabis companies and sit on their boards.

Altria, for its part, is a much larger company. In its last fiscal year to Dec. 31, 2017, Altria recorded US$25.6-billion in net revenue, a slight decline from the last year. And US$22.6-billion of these sales were from smokeable products. It booked US$10-billion in net earnings.

Altria has been making a push to expand beyond conventional cigarettes by introducing products that are seen to be less harmful. Its portfolio of non-combustible products includes smokeless, oral and heated tobacco and e-vapor.

Altria’s stake in Belgium’s AB InBev, which makes popular brands such as Budweiser and Stella Artois, is about 10 per cent. In 2017, Altria received more than US$800-million in dividends – thanks to its interest in the company.

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