Auxly Cannabis signs $123M deal with tobacco giant Imperial Brands

Imperial Brands is the latest multinational company to step into the Canadian pot industry, signing a $123-million investment deal with Auxly Cannabis Group that includes a research and development partnership and gives the Vancouver firm the global licences to the British tobacco giant's vaping technology.

The deal announced Thursday would give London-based Imperial Brands a 19.9 per cent stake through a debenture convertible into Auxly equity, with a conversion price of 81 cents per share.

That is 11 per cent higher than Auxly's share price on the TSX Venture Exchange on Wednesday, of 73 cents.

"The strategic partnership really enhances our ability to execute on our business strategy accelerates our growth plan," said Auxly's president Hugo Alves in an interview.

"So we are taking in a significant capital injection at a premium to our share price in a difficult market."

Shares of Auxly, which has a portfolio of cannabis brands and products, jumped by more than 20 per cent in early morning trading Thursday to 89 cents after the announcement. Shares had come down to 82.5 cents by late morning.

The additional capital will fuel Auxly's plans to roll out next-generation cannabis products, such as vapes, when legalized in Canada later this year, Alves added.

Imperial, whose tobacco brands include Winston and Davidoff cigarettes, will have the right to convert the debt into stock at any time during a three-year period.

If at the end of the term Imperial has not converted, the debenture will be repayable in full.

Tobacco looks to diversify

Imperial's chief development officer Matthew Phillips said diversifying its portfolio of next-generation products with this investment in Auxly provides the tobacco company with further options for future growth, and builds on last year's investment in Oxford Cannabinoid Technologies.

"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.

Imperial is the latest consumer packaged goods company to make its foray into pot, in a bid to diversify their offerings as consumer preferences shift.

In December, Marlboro maker Altria Group Inc. announced a $2.4 billion investment in Canadian cannabis producer Cronos Group Inc. to acquire a 45 per cent ownership stake, and the option to invest a further $1.4 billion within four years to up its stake to 55 per cent.

Also, Nanaimo, B.C.-based cannabis company Tilray Inc. last year struck an agreement to collaborate with Sandoz AG, part of the Novartis pharmaceutical Group, on medical pot products.

Alcohol giant Constellation Brands last year upped its initial $245 million investment in Canopy Growth Corp. by an additional $5 billion, giving it a 38 per cent stake in the Smiths Falls, Ont.-based cannabis company.

Auxly's chairman and chief executive Chuck Rifici co-founded Tweed Inc., which later became Canopy.

Alves said the deal with Imperial was the culmination of roughly five-and-a-half months of discussions with the company.

In addition to the funds and technology licences, Auxly will get access to Imperial's Nerudia vapour innovation business and become Imperial's exclusive global partner for future cannabis products.

In return, the British tobacco firm will designate one out of the five directors on Auxly's board plus one non-voting observer. As well, the chair of Imperial's product stewardship and health group will sit on Auxly's safety board.

The deal is expected to close in the third quarter, subject to approval from the TSX Venture Exchange.