It’s been a few days since OrganiGram (NASDAQ:OGI) announced it would acquire Edible & Infusions Corporation (EIC) for $28 million in OGI stock.
The move adds to the New Brunswick-based cannabis producer’s Western Canadian footprint, both in terms of products offered and manufacturing operations.
“Diversifying our manufacturing and R&D base gives us increased ability to fast-track our near-term commercial plans as well as expand our R&D efforts in addition to those already destined for the Centre of Excellence in connection with BAT,” OrganiGram’s press release stated.
Note: For those unfamiliar, BAT is short for British American Tobacco (NYSE:BAT). BAT owns 20% of OrganiGram.
Investors haven’t jumped on the OrganiGram bandwagon as a result of the deal’s announcement. As I write this at the end of the first full work week in April, OGI stock has fallen more than 10%.
I think the move makes a lot of sense. Here’s why.
Canada’s a Big Place
Have you ever driven across Canada? I have. In fact, I did the Vancouver to Toronto leg (2,718 miles) in late January, right about the time Canadian winters get real nasty. I completed the coast-to-coast experience when we moved to Halifax in February 2018. That was a more leisurely 1,114 miles. Also, in the dead of winter.
Hey, I didn’t say I was the sharpest tool in the drawer.
Anyway, the point is, Canada’s a vast expansive land. At one point in our history, you had to have a brewery in every province where you sold your beer. Today, the big brewers get by with fewer breweries.
Organigram produces its Edison Bytes chocolate edibles from its plant in Moncton. The first ones went out the door in February 2020.
“[Chocolate is] what we’ve kind of committed to as our major play within the space,” Ray Gracewood, then the SVP of marketing and communications, told Huddle, an online publication focused on Maritimes business.
“We might modify that strategy or look at different product types as we go forward. But for now, our big bet is we think a new sophisticated cannabis consumer is going to really react well to chocolate as a base product.”
I’ve tried some THC-infused chocolate, but I’m more interested in the soft chews area of the cannabis market, so this acquisition really jumped out at me.
It Needed a Western Base
Needless to say, the acquisition of EIC gives the company access to a state-of-the-art, 51,000 square foot facility that’s capable of producing all kinds of cannabis-infused products, including the all-important soft chews, which represent 75% of the edibles’ sales in Canada.
Currently, the edibles business has a 4.4% share of the overall Canadian recreational cannabis market. Organigram expects this share to grow to between 12% and 15% over the next few years, just as it has in the U.S. It also expects that soft chews will grow to represent 85% of the edibles market in Canada.
So, I don’t think investors should be so dismissive of this purchase. It’s a potential game-changer in the Canadian market. I like it a lot.
Something investors probably don’t know about the EIC acquisition: AgraFlora Organics International Inc. (OTCMKTS:AGFAF) owned 43% of the business. It started EIC with Cavalier Candies, Western Canada’s largest sugar confectionery manufacturer.
“We value James Fletcher’s tremendous knowledge of confectionary manufacturing and proven track record of fulfilling the product needs of some of the world’s largest retailers at Cavalier Candies,” Organigram’s press release stated.
The Bottom Line on OGI Stock
I last wrote about OrganiGram in March. At the time, I gave it passing grades for the composition of its board of directors. It can do better, but compared to some more established Canadian businesses it’s ahead of the curve.
I won’t lie, though. OGI is not my favorite cannabis stock.
However, this acquisition makes it an even better buy for speculative investors than in March because it accelerates its plans in an important part of the recreational cannabis market.
From where I sit, if you’re a shareholder, I don’t know how you don’t give this deal an A or B+. It’s definitely something to chew on.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.