Tobacco giant Imperial Brands is the latest multinational company to jump in the Canadian pot industry, with a $123 million investment into Auxly Cannabis Group Inc. (TSXV:XLY)(OTCQX:CBWTF). The deal includes a research and development partnership and and will give the Vancouver-based cannabis firm access to Imperial’s global licences for its vaping technology.
The investment deal announced Thursday will give the British tobacco company nearly a 20 per cent ownership stake in Auxly through a convertible debenture, with a conversion price of 81 cents per share. The price is 11 per cent higher than Auxly’s closing share price of 73 cents on the TSX Venture Exchange on July 24, 2019.
Shares of Auxly jumped more than 20 per cent on the news and closed Friday at 90 cents.
Auxly’s president Hugo Alves told The Canadian Press taking in the significant capital injection at a premium is because the cannabis market has become “difficult” further signalling capital is starting to dry up as the industry continues to battle high-profile scandals.
But Alves said in the company’s release the deal is worth it to help Auxly execute its business strategy.
“This investment from Imperial Brands will enhance Auxly’s ability to continue to deliver on our business plans and accelerate our growth initiatives to expand our portfolio of branded derivative products,” said Alves.
When the edibles and next-generation products become legal in Canada in October, Auxly plans to use the capital injection to help it focus on supplying the market with cannabis vape products.
— Auxly Cannabis Group (@AuxlyGroup) July 25, 2019
Auxly and Imperial’s R&D plans
The Vancouver-based pot firm will also be granted access to Imperial’s vapour innovation business, Nerudia, which has a growing team dedicated to cannabis research and a facility that is already licensed for research and development activities with cannabis.
Auxly said it will work closely with “a small dedicated team from Nerudia in developing a portfolio of new and enhanced [vapour] products and brands.”
Imperial, which brands include Winston and Davidoff cigarettes, has shifted its focus more on e-cigarettes and vaporizers as the devices explode in popularity.
Imperial’s chief development officer Matthew Phillips said the investment in Auxly will give the company the opportunity to further diversify its portfolio away from cigarettes by adding a stake into the growing cannabis sector.
“Auxly’s unique assets and capabilities, including strong science and product development credentials, make it an ideal partner for Imperial in the legal Canadian cannabis market,” he said in a news release.
The deal will also allow Auxly to become Imperial’s exclusive partner for the “future development, manufacture, commercialization, sale, and distribution of cannabis products of any kind anywhere in the world.”
The investment deal is expected to close in the third quarter of 2019, subject to approval by the TSX Venture Exchange. It will also give Imperial one out of five board seats at the cannabis company, which will give it some oversight of corporate governance at the company.
Cannabis lures big consumer goods players
Imperial becomes the latest entrant to the pot business from the consumer goods industry, as companies look to take advantage of growing political and social acceptance towards cannabis and diversify their offerings.
In December, fellow tobacco giant and Marlboro maker, Altria Group Inc (NYSE:MO) announced a $2.4 billion investment into Canadian cannabis producer Cronos Group Inc (TSX:CRON)(NYSE:CRON). The deal gave Altria a 45 per cent ownership stake in Cronos, with an option to raise it to 55 per cent later.
Also last year, one of the biggest moves in the cannabis industry so far took place when alcohol giant Constellation Brands invested $5 billion into pot heavyweight Canopy Growth Corp., giving it a 38 per cent stake in the Ontario-based cannabis firm.
Auxly’s chief executive and chairman Chuck Rifici co-founded Tweed Inc., which later morphed into Canopy.