Organigram Holdings Inc. said Tuesday it has acquired The Edibles & Infusions Corp. for C$22 million in stock, plus up to an additional C$13 million in shares, in its first deal since receiving a C$221 million ($176 million) investment from British American Tobacco PLC.
The additional shares will be paid once the EIC business reaches certain earnout milestones, Moncton, New Brunswick-based Organigram /zigman2/quotes/209289540/lastsale OGI +11.68% said in a statement.
Winnipeg, Manitoba-based EIC was co-founded by AgraFlora Organics International Inc. /zigman2/quotes/204372018/delayed CA:AGRA 0.00% and James Fletcher, chief executive of Cavalier Candies, one of Canada’s oldest confectionery businesses. The company operates out of a 51,000-square-foot manufacturing facility to produce cannabis edibles.
It currently has a license for research and processing and is in the midst of applying for a license to sell Cannabis 2.0 products, the name given to the second phase of Canada’s full legalization of the plant, when edibles and other non-flower products were allowed. The company is expecting to make its first sales of EIC soft chews in its fiscal fourth quarter.
“The integration of EIC will continue to provide our consumers access to innovative cannabis products while leveraging Organigram’s national sales and distribution network,” Organigram Chief Executive Greg Engel said in a statement.
Raymond James analyst Rahul Sarugaser said the deal will help consolidate Organigram’s already-strong position in the Canadian edibles market and add quality soft chew manufacturing expertise to its lineup of chocolate products.
“While the nascent Canadian edibles market makes up only about 4% of the adult-use market today, during the next few years we expect this regulation-constrained, COVID-hindered market to follow a trajectory similar to those observed in mature U.S. cannabis states, where edibles claim a greater than 10% market share, with soft chews and chocolates representing this category’s two most important product segments,” the analyst wrote in a note to clients.
Organigram said the deal will also diversify its manufacturing and R&D base, adding to those already destined for a Center of Excellence that it is building in collaboration with BAT /zigman2/quotes/210207837/composite BTI +2.07% /zigman2/quotes/209116881/delayed UK:BATS +1.27% .
The tobacco company said it would work with Organigram to develop the next generation of cannabis products, with an initial focus on CBD, the non-psychoactive ingredient in the cannabis plant that is widely held to have wellness properties.
The two are also hoping to crack the U.S. cannabis market, which is expected to be reformed under the administration of President Joe Biden, which has pledged to reform strict cannabis laws that continue to classify the plant as a Schedule I drug, grouping it together with heroin.
That has hampered the development of the legal sector, which is mostly limited to those states that have legalized for medical or adult recreational use and left companies mostly locked out of the federally insured banking system and capital markets.
In February, S enate Majority Leader Chuck Schumer said he would make reform legislation a key priority in the current Congress, bolstering hopes for an end to federal prohibition and helping to fuel a broad-based rally in the sector.
Reform hopes were boosted last week when New York finally legalized cannabis for adult recreational use, ending years of lobbying and political infighting. New York is expected to become the second biggest cannabis market in the U.S. after California.
Sarugaser from Raymond James said Canada’s Cannabis 2.0 market which came into effect early last year “has not yet found its stride.”
A slower-than-expected rollout was compounded by COVID-related manufacturing and Health Canada licensing disruptions, he said.
“Should cannabis retail stores begin to reopen in earnest during the back half of this year, we expect the adult-use cannabis market—and edibles market, in particular—to accelerate materially, with OGI well-positioned for advantage,” the analyst wrote. “With this capability bolstering transaction, we believe OGI is skating to where the puck is going, not where it is today.”
Raymond James rates Organigram stock as outperform.
Organigram shares were down 4.9% Tuesday, but remain up 150% in the year to date, after the entire sector rallied early in the year. The Cannabis ETF /zigman2/quotes/213173823/composite THCX +3.19% has gained 56% year-to-date, while the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.72% has gained 8.6%.