Cannabis and tobacco have been best friends for a long time, albeit in a sometimes discriminatory fashion. However, things could soon be about to change.

A CAD$ 220 million (USD$175 million) deal has been secured between a subsidiary of cigarette producer British American Tobacco (BAT) and Atlantic Canada-based cannabis company Organigram.

Described as a “strategic collaboration”, the partnership will see the two companies embark on a research and development (R&D) project that aims to promote the evolution of efficient cannabinoid delivery systems.

Furthermore, BAT and Organigram envision the deal metamorphosing into similar deals with various U.S. multi-state operators (MSOs) once the green plant is relieved of its federal restrictions. This was reconfirmed by an industry analyst.

“Global tobacco and alcohol giants are investing in Canadian LPs to understand cannabis markets and generate IP to deploy into U.S. markets, which is likely to manifest in similar investments into U.S. MSOs,” said a senior analyst at Vantage Asset Management in Toronto, Max Mausner, during an interview with Marijuana Business Daily (MJBizDaily).

Specifically, the BAT subsidiary gobbled up a 19.9 percent stake in Organigram by purchasing 58.3 million common shares at a price of CAD$3.792; these figures are based on a five-day average price on the Toronto Stock Exchange.

Center of Excellence to be established as part of cannabis-tobacco partnership

BAT and Organigram have come to an agreement to form a Center of Excellence in which CBD product development will be the primary goal. The chosen location is Organigram’s indoor facility, which can be found in Moncton, New Brunswick. The establishment is in possession of the required license distributed by Health Canada for cannabis-related research and development (R&D) purposes.

“With the significant capital injection, Organigram is even better positioned to expand into the U.S. and further international markets at the appropriate time and subject to applicable law,” the company wrote in a press release.

The two companies involved in this cannabis-tobacco partnership are also striving to form a committee tasked with governing and supervising the project as a whole; the steering committee will comprise an equal number of both company’s senior staff. As per the agreement, BAT and Organigram will globally commercialize the products, intellectual property and technologies on an independent basis.

“I don’t think the market appreciates this British American Tobacco deal. BAT is an $85 billion market cap company – this $170 million deal for 20 percent of Organigram isn’t about Canada,” said Mausner.

Cannabis is a “natural fit” for the tobacco industry, says analyst

Numerous analysts have dug their noses into the cannabis-tobacco partnership between BAT and Organigram. For the most part, the deal has been viewed as a positive one, with experts stating that there is less risk of damaging company reputation amid the evolving climate. They attribute reduced risk to the fact that the tobacco industry boasts advanced technology nowadays. Moreover, growth of the cannabis industry is not expected to threaten the nicotine sector but instead, bolster it.

“Cannabis overall provides a natural fit for tobacco and a big incremental growth opportunity,” wrote Jefferies analyst Owen Bennett in a note to clients. “Tobacco knows how to operate in a regulated environment. They have experience around growing a crop, and can even help shift many tobacco farmers over to cannabis, particularly for hemp CBD where outside growth is more common,” he continued.

He believes that the cannabis market is on-track to become the biggest on the planet; especially in the United States, where much of the map has turned green over the last few years. With that being said, Bennett believes that it is strategically practical for big tobacco to make its foray into the cannabis space.

“BAT is a major investor in Organigram with a 19.9 percent ownership. Each company will have independence, but the steering committee that oversees the development will be in a position to look at commercial readiness of products,” Bennett continued, adding that, “We both look at it from the perspective of creating the strongest products first, and the way we come to market would be very different in different markets and segments. In the near term in Canada, with THC-based products, we’d be sooner to market than they would.”