- £126m investment for 19.9 per cent stake in Canada-based Organigram
- Deal reflects the group's ongoing expansion into ‘reduced risk alternatives’
British American Tobacco (BATS) is pushing further into the cannabis market, announcing a £126m investment and strategic collaboration with Organigram (CA:OGI). The tobacco giant will take a 19.9 per cent stake in the Canadian company – becoming its largest shareholder – and appoint two directors to its board.
Organigram, which is listed in both New York and Toronto, develops and sells recreational and medical cannabis products in Canada, which legalised use of the drug in 2018. News of BAT’s investment sent the shares up by around two-fifths in New York to 404¢.
The partnership will focus on the research and development (R&D) of adult cannabis products, such as cannabidiol (CBD), with both companies being able to independently commercialise these products under their own brands. BAT’s scientific research director Dr David O’Reilly said the deal provided "reduced risk alternatives to combustible cigarettes, as well as going beyond tobacco and nicotine.”
As cigarette sales come under pressure in western countries, tobacco companies have been turning to so-called ‘reduced risk alternatives’, such as vaping. Cannabis represents another opportunity to diversify, particularly amid increasing legalisation and public acceptance at the state level in the US.
The tobacco giant is not the first mover in this regard. Marlboro maker Altria (MO) purchased a 45 per cent stake in Canadian cannabinoid company Cronos (CA:CRON) for $1.8bn (£1.3bn) in 2019, while Imperial Brands (IMB) struck a £75m R&D partnership with Canada-based Auxly Cannabis in the same year.
Yet Big Tobacco’s forays into the cannabis market have yet to pay off. Momentum may come if cannabis is decriminalised at the federal level in the US – which is not out of the realm of possibility now that Democrats control both the House and Senate – although a flood of new participants could result in the sector becoming overcrowded. There are also steep regulatory barriers across much of the globe, so it seems prudent to exercise caution around the recent cannabis investment hype. Hold at 2,665p.
Last IC View: Hold, 2,600p, 17 Feb 2021
