British American Tobacco has made its first investment in cannabis, taking a 20 per cent stake in Canadian weed producer Organigram.
The UK-based maker of Lucky Strike and Dunhill cigarettes on Thursday said the deal, valued at roughly £126m, included an agreement to collaborate on “next generation adult cannabis products” with an “initial” focus on CBD, the legal cannabinoid that does not leave users feeling high.
David O’Reilly, head of scientific research at BAT, said the tie-up would bolster efforts to move “beyond tobacco and nicotine into new and exciting areas of product innovation”, as the company adapted to “meet the evolving needs of adult consumers”.
Tobacco groups have sought to offset falling cigarette sales, particularly in the US and western Europe, with so-called reduced-risk alternatives such as vaping devices, while attitudes towards the recreational use of cannabis have mellowed since liberalisation in North America.
Organigram grows marijuana for medical and recreational use in Canada, which legalised the drug in 2018. Its brands include Shred and Trailblazer, which sell THC-grade cannabis that produces a high.
Shares in dual-listed Organigram jumped more than 30 per cent after the announcement.
Owen Bennett, analyst at Jefferies, said that cannabis made “strategic sense for big tobacco”. Aside from the two industries’ similarities, he said there was “arguably less reputational risk” in cannabis.
Both sectors operate in heavily regulated markets and revolve around an agricultural product, but the illegal status of cannabis in most countries has made tobacco groups wary of entering the industry.
The BAT deal comes after investments in the sector by US rival Altria and UK-based Imperial Brands. Altria bought a 45 per cent stake in cannabis group Cronos for $1.8bn in 2018, while Imperial took a stake in Canadian company Auxly Cannabis Group last year.
Scientists from both BAT and Organigram will develop products at Organigram’s facilities in New Brunswick, Canada.
BAT, which piloted a CBD vaping device in Manchester, England, in January said the two companies would both have the right to sell any “new and potentially disruptive” products developed as part of the alliance.
The cannabis industry has seen an influx of investment since legalisation in Canada.
In the US, consumption of the plant remains illegal on a federal level but dozens of states, including California, Colorado and Arizona, have approved its use for any reason. Cannabis proponents’ hopes for federal decriminalisation have jumped since Democrats took control of the US Senate.
Talk of potential liberalisation has also spread to Europe, where cannabis use remains largely illegal. This week, the world’s largest cannabis retailer Curaleaf agreed a $300m-plus deal to buy one of Europe’s biggest cultivators of marijuana.