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Inside the Organigram cannabis plant in Moncton, New Brunswick, on October 12, 2019.John Morris/The Globe and Mail

Shares of cannabis producer Organigram Holdings Inc. soared 40 per cent Thursday on news that British American Tobacco PLC had poured $221-million into the Moncton company, taking a 20-per-cent stake and two board seats.

The British tobacco giant’s all-stock investment will see it purchase 58.3 million Organigram shares at $3.79 each, a price that was based on a five-day weighted average of the stock’s close on March 9.

The deal also includes a product development collaboration that will see Organigram (OGI) and British American (BAT) set up a facility in Moncton that will focus on developing a new line of cannabis vaping and other oral products. Under the terms of the agreement, both companies will have access to each other’s current intellectual property, although British American will own all the intellectual property developed in collaboration with Organigram.

“This deal is really about bringing the IP of both companies have together,” Greg Engel, Organigram’s chief executive officer, said in an interview with The Globe and Mail.

This is the fourth major investment made by a large multinational company in the Canadian cannabis industry, and the first significant one since the cannabis industry bubble burst in mid-2019.

The deal follows Constellation Brands Inc.’s $5-billion investment in Canopy Growth Corp., tobacco giant Altria Group Inc.’s $2.4-billion or stake in Cronos Group Inc., and tobacco company Imperial Brands PLC’s $123-million investment in Auxly Cannabis Group Inc.

“In our view BAT selected an excellent partner in OGI,” wrote Raymond James analyst Rahul Sarugaser in a Thursday morning note. “With the second and third largest tobacco companies now having taken material stakes in two of Canada’s leading cannabis producers, this, in our view, portends a flood of investment not just from other tobacco companies but other alcohol and beverage providers and large [consumer product group] companies more broadly.”'

Mr. Engel described the process leading up to the deal as a lengthy one, owing largely to the challenges created by COVID-19, which forced both parties to conduct meetings, due diligence and facility tours virtually.

Organigram had approximately $22-million in cash as of Feb. 28. The investment boosts the company’s cash position to $296-million, according to a media release from the company.

“It really does give us a strong capital position to continue our own research and development efforts outside the core product area,” Mr Engel said.

Jeyan Heper, BAT’s group category director, as well as a long-time executive in the consumer-packaged goods sector will be nominated to Organigram’s board.

Organigram was widely considered a first-mover in the cannabis industry, alongside Aurora Cannabis Inc. and Canopy, achieving more than 20-per-cent market share in the recreational segment in the months following legalization in 2018. But it has struggled to retain that market position, experiencing declining revenues as more companies offering similar product lines such as premium dried flower and vape pens entered the market.

“What has been disappointing is that Organigram has not been able to materially grow its recreational sales for a number of quarters even though the industry has expanded,” Bank of Montreal analyst Tamy Chen wrote in a note issued just one day before the deal was announced. Citing fundamentals that were out of sync with the company’s elevated stock price, Ms. Chen slapped a “sell” rating on the company.

Indeed, Organigram’s stock was part of a massive sectorwide run-up in early February fuelled by the Reddit trading community, climbing as much as 160 per cent to more than $7.60 in the span of two days. To a large extent, the company’s stock price is still coming off that February high.

The company’s stock has hovered below $2.50 for most of 2020, a year that was particularly cruel for the Canadian cannabis sector, as corporate governance shakeups and supply chain issues sent investors fleeing. When asked how BAT and Organigram ended up agreeing to the deal at a stock price of $3.79, Mr. Engel said the companies had a target timeline they were working toward, and early March, 2021, was simply the timing both parties ended up landing on.

While there are no specific details yet on the kinds of products BAT will develop in collaboration with Organigram, Mr. Engel hinted that both sides intend to focus on addressing some of the quality-control challenges that have faced the U.S. and global cannabinoid (CBD) markets. CBD products made in Canada, however, still cannot be legally exported outside the country.

“Getting our products to other markets is not the issue. You can find a contract site to do your manufacturing for you in that market, and that may even be more cost effective,” Mr. Engel said.

Bank of Montreal acted as exclusive financial adviser to Organigram and Goodmans LLP acted as its primary legal adviser with DLA Piper as its European counsel. Herbert Smith Freehills LLP and Stikeman Elliott LLP acted as legal advisers to BAT.

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