Organigram Holding Inc.’s OGI-T shares surged 30 per cent Monday morning after the company announced a $124-million investment from a British tobacco giant, which it will use in part to create a new strategic innovation fund.
BT DE Investments Inc., a subsidiary of British American Tobacco BATFF, will be issued 38 million shares at a price of $3.22 per share in three tranches, about double the $1.59 that shares were trading at the end of the previous close on Friday.
The investment brings BAT’s common voting share ownership to 30 per cent and overall equity interest to 45 per cent (including preferred shares), the company said in a press release Monday morning. BAT has made a number of investments in Organigram since 2021, when it acquired 20 per cent of the company’s equity.
Of the total investment, Organigram will use $83-million to create “Jupiter,” a strategic fund designed to expand its geographic footprint outside of Canada.
In an interview, Organigram chief executive officer Beena Goldenberg said the company will take advantage of current markets globally, where many cannabis companies are undervalued.
“The whole cannabis market has continued to decline pretty consistently since highs of 2021,” Ms. Goldenberg said. “Most cannabis companies are trading at all-time lows.”
She said the company is particularly focused on advancing its non-combustible products, which includes edibles, beverages and vapes.
The company will also consider any Canadian businesses that complement its existing portfolio, though this would not fall under Jupiter, Ms. Goldenberg said.
“There will be a shake-out in Canada. There are too many players with not enough cash runway, and very little available cash to raise today in the market. If there’s the right opportunity in Canada, we’ll look at it.”
The rest of BAT’s investment will be used for general corporate purposes.
Royal Bank of Canada analyst Douglas Miehm called the transaction a positive for the cannabis company.
“In our view, this partnership strengthens OGI’s strategic and financial positioning for product development and geographical expansion,” Mr. Miehm in a note to investors Monday morning.
BAT’s investment is the latest in a number of major plays made by tobacco companies aiming to diversify into pot products and find efficiencies in manufacturing and distribution.
In 2018, U.S. cigarette maker Altria Group, Inc. bought a 45-per-cent stake in Cronos Group for $2.4-billion, with the option to invest an additional $1.4-billion for a further 10 per cent. But last year, Altria let its warrants expire, and in July the company said it was exploring options to sell its Cronos stake.
In 2019, British tobacco manufacturer Imperial Brands PLC invested $123-million in Auxly Cannabis Group Inc. XLY-T, giving the Vancouver pot company licences to its vaping technology. In July, the companies agreed to extend the debenture by two years to 2026.
Five years after federal legalization, the Canadian pot sector continues to struggle. Organigram’s stock started Monday down 66 per cent from the beginning of the year. In its latest quarter reported in July, the company posted a $120-million net loss, most of which it attributed to a $191-million writedown of its goodwill, property, plants and equipment.
More broadly, the Horizons Marijuana Life Sciences ETF, which includes a basket of North American cannabis stocks, is down about 30 per cent since the beginning of 2023, and by nearly 67 per cent since the start of last year, according to Alberta-based financial services company ATB Financial.
In a survey of 23 Canadian and U.S. institutions conducted in October, ATB found that the majority were bearish on Canadian cannabis retailers and producers, and have either reduced or kept their net exposure unchanged over the past six months.
However, ATB found that investors are more positive about the U.S. pot market, given hopes that cannabis will be reclassified from Schedule I to Schedule III in the next 18 months. Doing so would mean the drug is still federally illegal, but would be a step toward full legalization.