After quite a lull, mergers, acquisitions, and strategic stake buys are back in style in the marijuana industry. The latest such arrangement is British American Tobacco's (BTI -1.29%) purchase of a sizable stake in OrganiGram (OGI -5.09%) for a cool $175 million.
In this Motley Fool Live video clip, recorded on March 12, longtime Fool contributor Eric Volkman and healthcare and cannabis bureau chief discuss Corinne Cardina the whos and whys of this powerful pot sector deal.
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Corinne Cardina: Let's talk about some news from this week. I think it was mid-week, British American Tobacco announced that they took a nearly 20% stake of OrganiGram. Eric, what should investors know about this deal and what does it say about the weed [mergers and acquisitions] landscape?
Eric Volkman: Well, it's the latest M&A deal in marijuana, which has seen several deals over the past couple of weeks, couple of months.
I think things are getting serious. If you look at marijuana, it's still very standard[ized]. You have a lot of companies doing the same thing. They're all vertically integrated, they're all involved in growing, processing, and retail. They're still -- even with the recent share price run-ups -- a lot of them are still fairly cheap, both on a total cost basis and on valuations.
You have companies in the "legitimate sectors" taking a look at this, and going, "this might not be a bad time to get involved in something like [marijuana]." In the case of British American Tobacco, they've already been dipping their toes into the sector kind of, sort of, with their Vuse brand. That's a vaping brand. They just rolled out a CBD product. CBD is the substance in cannabis that does not get you high and it's purported to have medicinal properties, although more research needs to be done on that.
British American Tobacco, because they've become involved in CBD, they want to push a little further in that direction because cigarette companies [know] there's no future in cigarettes. There hasn't been a future in traditional cigarettes for a long time because of health regulations, crackdowns all over the globe on smoking, and a general turn with people toward more healthy lifestyles and better habits and living longer. Cigarettes just don't fit into this.
For cigarette companies, that's why they're leaning so hard on alt-cigarette products like e-cigarettes, heated tobacco products. British American Tobacco, they're getting into that. CBD, it's a niche, and it's become popular among a certain segment of the population. They're trying that out.
They're taking what seems to me a flyer on OrganiGram, because $175 million to our eyes, it's a lot of money; to OrganiGram, that's a lot of money; to British American Tobacco, that's not a lot of money. That's really just a drop in the bucket.
I think they had something in their latest reported quarter, they had something like over 3 billion British pounds ($4.1 billion) in cash alone. This is like buying chewing gum for them.
They're taking a flyer on this and -- I love this -- they're going to establish with OrganiGram a "Center of Excellence" at OrganiGram's main facility, which is up there in New Brunswick, one of the more northern, one of the smaller, I should say, Canadian provinces.
[The deal] is much more impactful for something like OrganiGram. It gives them a big infusion of ready cash, which like almost every other marijuana company, they are definitely going to need. It's great for OrganiGram, it's going to give them cash fuel for the next couple of quarters.
Cardina: Definitely, and it's not without precedent. Altria took $1.8 billion interest in Cronos Group, so that is obviously a much bigger deal than this -- like you said -- $175 million.
But we're seeing a lot of these big companies in sluggish industries. Same thing with Constellation Brands and Canopy Growth. Of course, people are drinking less, so they want to make sure they have exposure to the growth in cannabis.