British American Tobacco PLC (LSE:BATS) revealed late on Monday that invested £48mln (US$58.6mln) in US cannabidiol (CBD) specialist, Charlotte's Web Holdings, which analysts said was "interesting" and potentially "significant".
The investment was made via a convertible debenture which could result in FTSE 100-listed BAT holding a 20% stake.
Based in Boulder, Colorado, Charlotte's Web is a market leader in hemp-derived CBD wellness products, such as a range of oils, gummies, skincare and healthcare items.
It also has an option to acquire US THC cannabis company, Stanley Brothers USA, upon federal legalisation of cannabis in the US or such earlier time when otherwise permitted by stock exchange rules.
For BAT this follows its other moves into cannabis and CBD in the past couple of years, including paying £129mln for a 20% stake in Canadian THC company Organigram in March 2021, the establishment last year of a ‘centre of excellence’ to focus on "developing the next generation of cannabis products, with an initial focus on CBD", and funding provided by its venture arm to a number of cannabis related companies, including most recently US$37.6mln to German cannabis company Sanity as Germany prepares for a legal recreational market roll-out in 2024.
BAT said it made the deal as Charlotte’s Web has a "clear" appeal, according to chief growth officer Kingsley Wheaton, who pointed to "a wide portfolio of high-quality products, strong brand equity, an extensive retail presence and robust B2C e-commerce platform serving a loyal US consumer base, and a track record of in-depth scientific research".
Charlotte's Web boss Jacques Tortoroli said the investment will provide funding to "help unlock deeper and broader research and development".
'Interesting deal'
Broker Jefferies said it was "yet another signal" of BAT's 'Beyond Nicotine' ambitions in the cannabis space, both CBD and THC, with the US the "holy grail" for cannabis markets.
Analysts also said the Stanley Brothers THC option made it a more "interesting" move and wondered if BAT is "potentially even positioning for US THC exposure", where major groups have avoided investments in US THC due to its federal illegality.
"While federal legalization looks some way off still, stock exchange permissibility may come very soon (even next 12-18 months)," the analysts said.
"Whether BAT is doing this for the latter reason (exposure when North America stock exchange listing is allowed) is unclear, as it may then impact its own LSE listing (this also unclear), but it may signal increased optimism around the former (federal legalization)."
If permissibility arrives, the potential contribution from US CBD and THC is significant, the analysts added.
"Looking at CBD first, trends here have been held back by regulatory uncertainty from the FDA. Once we get guidance, prospects are bright, with industry sales potentially hitting $20bn or more by 2032 vs around $6bn today. Then on THC, the outlook here is very compelling. Industry sales this year to hit $27bn vs just $9bn in 2017, and then we think sales can easily hit $70bn by 2032."