Big tobacco has been behind the curve with the legal cannabis industry thus far and seems to be following the footprint of big alcohol. Companies such Constellation Brands, Inc. (STZ) and Molson Coors Beverage Company (TAP) have executed major agreements with Canadian LP’s that are starting to look like brilliant moves.
Big tobacco’s recent foray into the Canadian cannabis industry shows that a change of tides is occurring at some of the highest levels of big business.
Most recently, British American Tobacco plc (NYSE: BTI) announced an investment in Organigram Holdings Inc. (Nasdaq: OGI) (TSX: OGI), a mid-tier Canadian Licensed Producer. In 2014, we started to cover Organigram and have watched the business overcome a radical change in management, a large contamination issue, and have been impressed with the continued level of execution by the current CEO.
Through an investment from British American Tobacco, Organigram has a much stronger balance sheet. Earlier this week, the Canadian LP reported to have repaid approx. $58.5 million of debt from a credit agreement with Bank of Montreal (BMO). Following the repayment, Organigram reported that its pro forma cash position is $235 million.
Altria Group Inc. (MO) was the first big tobacco company to enter the Canadian cannabis industry through a more than $1 billion investment in Cronos Group (CRON: TSX) (Nasdaq: CRON).
Since receiving the investment, Cronos has expanded into strategic international markets and we are favorable on how the story has advanced. The Canadian LP was a first mover on the Israeli and this is a market we are bullish on over the near and long-term. Although Altria was late to the Canadian trade and invested near the peak of the market, we believe it chose an operator with a management team who has a track record of execution.
Questionable investments by multinational conglomerates leaves us questioning their understanding of the cannabis industry. We believe the next growth phase will take place in the US and are bullish on the industry following a “blue wave” in the 2020 election.
Going forward, we are going to monitor how these conglomerates respond to a potential change of federal cannabis legislation in the US. After New York passed recreational cannabis legislation, the market is even more focused on the opportunity in the US and this is a trend we are bullish on.
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