Tobacco: Barbarians at the Cannabis Gate?
The cannabis sector is abuzz over BAT’s recent C$125M follow on investment into their Organigram partnership, including the creation of a strategic investment pool (Jupiter). It may appear that BAT is positioning Organigram as their cannabis subsidiary, with the ability to co-create IP and build out a global footprint - and the potential for tuck in at a later, more regulatory-favourable date.
The optics and aspects of the deal are good for Organigram (and the cannabis industry). However, they are less compelling when you consider the details. BAT is essentially buying up to 49% of Organigram at a 2x premium but gaining effective control well before that equity level. The money will be deployed in three tranches with the first $42M showing up in January 2024 and the second happening in August 2024. The transaction doesn’t fully close until February 2025. Ultimately, the value of the deal will depend on the ability of Organigram to develop and commercialize product innovations and successfully penetrate local & global markets.
Even with this transaction, there is no clear method to tobacco’s madness in cannabis. Previous deals have been a mix of adult use and medical toe tipping from a scale perspective. Depending on your vantage point, these moves could be interpreted as offensive, defensive or merely a desire to learn about the sector. Unless you are in one of the board rooms, it is impossible to say what the motivations of the parties have been.
Does BAT's new investment signal tobacco’s renewed, short term interest in cannabis?
I’m not so sure, for the following reasons:
- The lack of regulatory clarity and harmonization in the two largest markets - the US and EU - plus a roadmap to reform will be a turn off;
- Tobacco is in no rush. Until real reform occurs and/or financial results improve the entire cannabis sector will effectively remain on sale from a valuation perspective;
- At this time, few companies are big or special enough to merit a big acquisition. Multi-billion dollar tobacco firms need to acquire a large LP or MSO to move their financial needle.
However, in the long run tobacco firms might well be the strongest, most motivated buyers into the cannabis space. Cannabis’ appeal is undeniable. Tobacco companies are very experienced with combustible substances, winning the sales ‘ground game’, navigating highly regulated markets, and influencing policymakers when they really want to.
Finally, tobacco firms have the fortress balance sheets, global supply chains and cash to make sizeable investments into quality assets when they so choose.
#BAT #Tobacco #M&A #Organigram #OGI