Forgive the pun, but the cannabis industry is truly budding before our eyes. According to a newly released report from Arcview Market Research and BDS Analytics, global pot industry sales more than tripled from $3.4 billion in 2014 to $10.9 billion by 2018, and they're poised to nearly quadruple to $40.6 billion by 2024. Mind you, this figure doesn't include pharmaceutical-based cannabinoid sales, or cannabidiol (CBD) sales from general retail stores.
This growth has played a big role in pushing marijuana stock valuations significantly higher since 2016. And it's also been the dangling carrot that's lured big investment dollars into the cannabis space. Just this past week, we witnessed yet another brand-name company diving into the industry with a major investment -- albeit the company chosen to be the recipient of the investment might surprise a lot of folks.
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Big Tobacco just invested in a cannabis penny stock
On Thursday, July 25, U.K.-based tobacco giant Imperial Brands (IMBBY 0.03%) announced that it would be making an investment of 123 million Canadian dollars ($93.4 million) into marijuana penny stock Auxly Cannabis Group (CBWTF +1.19%) by way of a convertible debenture. With a conversion price of CA$0.81 per share, representing an 11% premium to Auxly's previous day's closing price, Imperial Brands has the option of exercising the note at any point during its three-year term, or could choose to have the debt repaid in full after the term is over. Effectively, this gives Imperial Brands a 19.9% stake in Auxly Cannabis on something of a trial basis.
It's worth noting that, despite a minuscule share price, Auxly has a lot of outstanding shares, thereby giving it a market cap of $401 million (that's in U.S. dollars) as of this past weekend. So it's not as if Imperial Brands is sinking CA$123 million into a practically unheard-of penny pot stock.
For Auxly, the advantages are threefold. First, the company certainly needs the CA$123 million to execute on its long-term strategic initiatives, which include completing a joint venture and wholly owned grow farm construction, as well as developing a portfolio of branded derivative products (derivatives are non-dried-flower pot products, such as vapes, edibles, infused beverages, and topicals).
Second, Auxly gains access to Imperial Brands' expertise when it comes to marketing its product domestically and globally. Not to mention, as cannabis pushes legally into new markets, Imperial Brands may offer a pathway for Auxly to quickly push into these countries.
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Third and finally, Auxly gains access to Imperial Brands' proprietary vaping technology and vapor innovation business, known as Nerudia. Vaping is forecast to be the leading revenue generator among derivatives in Canada, which is set to launch a host of derivative products by mid-December. Since derivative cannabis products offer significantly higher margins than dried marijuana flower, this works out as a win for both companies.
For Imperial, the company behind the Kool and Winston tobacco brands, this partnership is a relatively low-risk means of supercharging its growth potential, especially with a number of developed countries becoming more stringent with their tobacco laws, and adult smoking on the decline in developed countries.
This isn't the first surprising cannabis deal we've seen, and it's unlikely the last
Sure, this deal is surprising in the sense that it wasn't a more established player like Aurora Cannabis or Aphria that landed it, but this isn't the first time that a brand-name company has shocked Wall Street with an investment in the cannabis industry.
For example, in August 2018, Molson Coors Brewing (TAP +1.35%) formed a joint venture (known as Truss) with Quebec-based HEXO (HEXO +0.00%). When HEXO landed this partnership, it was considered a fringe major grower, but was still in the process of establishing its brand in the marijuana space. To have landed a joint venture from a global giant like Molson Coors was a big deal for HEXO, and with the launch of infused beverages roughly 4 1/2 months away in Canada, it could turn into a win for Molson Coors, too.
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In June, vape device giant PAX Labs wound up choosing four partners for its PAX Era vape platform. While three of the four growers are well known, the fourth, Supreme Cannabis Company (SPRWF +0.00%), likely came as a surprise to many. It's a niche grower in that it focuses on premium and ultra-premium dried flower and derivatives. With most growers focused on discount or average-quality marijuana, this made the relatively unknown Supreme Cannabis the perfect partner for PAX Labs.
And who could forget the mammoth $1.8 billion equity investment Cronos Group (CRON 0.38%) nabbed from tobacco giant Altria, which closed in mid-March. Altria's investment netted the company a 45% nondiluted stake in Cronos, and provides it with a means to grow its business beyond simply passing along price hikes to consumers, which has been a regular source of growth for tobacco producers for years. Meanwhile, Cronos Group gains access to capital that it can use to push into overseas markets and develop a line of vape products and other derivatives.
The point being that tobacco, beverage, and even pharmaceutical companies see the long-term potential in marijuana, and it's very likely that we'll see more investments and partnerships. Aurora Cannabis, for instance, hired billionaire activist investor Nelson Peltz as a strategic adviser in March. Peltz has a keen understanding of the snack and beverage industry, making him the perfect bridge between Aurora Cannabis and a global snack or beverage brand.
More deals are coming, and we shouldn't be surprised if major brands wind up partnering with lesser-known cannabis stocks.
