Another Big Tobacco Company Invests in Pot -- and Its Partner Might Surprise You

Imperial Brands is buying nearly 20% of a Canadian cannabis company. But it's not Aurora Cannabis, Aphria, or HEXO.

Keith Speights
Keith Speights
Jul 26, 2019 at 7:15AM
Health Care

Cannabis is attracting the attention of some really big companies outside of the industry. These include major alcoholic beverage makers like Constellation Brands and Molson Coors Brewing. They also include large tobacco companies such as Altria.

Another big tobacco company, Imperial Brands (OTC:IMBBY), previously dipped its toes into the cannabis waters in 2018 with an investment in British medical marijuana research company Oxford Cannabinoid Technologies. Now, Imperial Brands is investing in a Canadian cannabis producer. And its new partner might surprise you.

Shadow of a dollar sign on top of a pile of marijuana leaves

Image source: Getty Images.

Thinking small but wide

You might think that Imperial Brands could have chosen a company like HEXO as its cannabis partner. After all, HEXO CEO Sebastien St.-Louis has stated publicly that his company is in discussions with multiple large players outside the cannabis industry. Or maybe Imperial Brands would have picked Aphria or Aurora Cannabis, both of which rank in the top three in production capacity.

But the tobacco giant instead went with a relatively small company, Auxly Cannabis (OTC:CBWTF). Before the announcement of the deal with Imperial Brands, Auxly's market cap was only around $330 million.

But what Auxly lacks in size, it makes up for with its wide scope of operations. The company is more than just a cannabis producer. It spans the cannabis supply chain, including upstream cultivation, midstream extraction and processing, and downstream distribution and sales.

It has built its business through a whirlwind of deals. The company has signed revenue streaming partnerships. It's formed joint ventures. It's made equity investments in other cannabis companies. And Auxly has bought some companies outright, setting them up as subsidiaries.

Terms of the deal

This isn't a game-changing tobacco-and-cannabis partnership along the lines of the one between Altria and Cronos Group, though. The numbers are significantly smaller than that major deal.

Imperial Brands is investing 123 million in Canadian dollars through a convertible debenture, which will give it a 19.9% stake in Auxly. In addition to the added cash, Auxly will be able to use Imperial Brands' vaping technology on a global basis as well as have access to its vapor innovation business, Nerudia.

But it's not a hands-off investment by Imperial. Auxly will become the tobacco company's exclusive partner for cannabis-related initiatives. Imperial also gets to name a member to Auxly's board of directors plus one nonvoting observer. In addition, an executive from Imperial will sit on Auxly's new Safety Board, which will oversee the safety, efficacy, and quality of all its products. 

Potential repercussions

Although the investment that Imperial is making in Auxly pales in comparison to some of the other deals in the cannabis industry, it's obviously huge for Auxly Cannabis -- its shares soared after the news was announced.

Perhaps the most interesting thing to watch will be the potential repercussions of the partnership. A few big tobacco companies are still sitting on the sidelines with respect to cannabis.

Imperial's move could also spur other major companies that aren't tobacco makers to consider investing in cannabis partners. It wouldn't be surprising for the relatively small size of this latest transaction to be attractive to big consumer packaged-goods companies that want to position themselves for growth in the global cannabis market without spending billions, as Altria and Constellation have done.

Of course, to invest a small amount and make a big enough difference to matter requires big companies to partner with smaller cannabis producers. It's possible that we won't see many $1-billion-plus transactions in the near future if Imperial Brands' partnership with Auxly establishes a precedent that's attractive to other large corporations.

But you can bet that Aurora Cannabis and HEXO -- both of which are actively courting partners -- will use the Imperial-Auxly pairing to stir interest in their own potential deals. Peer pressure works in the business world, much as it does among teenagers.