Lately, there’s been a lot of buzz around the major investments coming into the cannabis industry from some of the world’s largest alcohol companies. Constellation Brands (NYSE:STZ) (NYSE:STZ.B) invested $5 billion CAD in Canopy Growth Corp. (TSX:WEED) (NYSE:CGC) and now investors are chomping at the bit to see who will follow them.
While speculations regarding the alcohol giants’ next moves have fizzled out as investors wait for official announcements, one of the world’s largest tobacco merchants has been quietly making moves in the marijuana space.
According to Bloomberg, Pyxus International, Inc. (NYSE:PYX), formerly known as Alliance One International, Inc. (NYSE:AOI) “is an independent leaf tobacco merchant serving large multinational cigarette manufacturers. The Company selects, purchases, processes, packs, stores, and ships leaf tobacco. Alliance One also provides, in certain developing markets, agronomy expertise, and financing for the growing of leaf tobacco.”
What Bloomberg’s description fails to mention is that Pyxus International also owns majority stakes in Canadian cannabis producers through a wholly owned indirect subsidiary.
Pyxus/Alliance One Trades More than Tobacco
Back in February when Pyxus/Alliance One International announced results for its fiscal quarter that ended December 31st, 2017, Pieter Sikkel, President and Chief Executive Officer also mentioned the tobacco company’s plan to diversify its business:
“In January, we successfully acquired majority stakes in two new joint ventures. The extension into growth segments, namely e-liquids, industrial hemp and cannabis, expands Alliance One’s presence in higher margin, fast-growing categories. We intend to broaden our business portfolio over the next three to four years by focusing on consumer-driven agricultural products, with increased operating margins when compared to our historical leaf processing business.”
Pyxus/Alliance One’s Cannabis Investment Timeline
E-Liquids Came First
All the way back in 2014, when Alliance One started Purilum, LLC as a joint venture between IOTO E-Liquids America and its subsidiary AOSP Investments, the company’s management probably had no idea that they were setting the company up for cannabis industry success down the line.
What was just an e-liquid venture back then has since been built upon to create a vertically integrated cannabis company within Alliance One’s coffers.
Step 1: Hemp-Derived CBD
Starting small with hemp, in December 2017, Alliance One subsidiary Pure-Ag NC, LLC acquired a 40% equity position in North Carolina-based Criticality, LLC with triggers that allow for consolidation up to 50% on or after March 31, 2020.
Criticality, LLC utilizes the strength of Alliance One’s farmer network to grow industrial hemp in North Carolina under the state’s pilot program, which is then used for cannabidiol-rich hemp oil extraction in Criticality’s facility in North Carolina.
Step 2: Medical Marijuana
In January 2018 Alliance One went one step further when its wholly-owned indirect subsidiary Canadian Cultivated Products, Ltd., now called FIGR, Inc., acquired a 75% equity position in Canada’s Island Garden Inc. and an 80% stake in Goldleaf Pharm Inc.
Recent Updates from Alliance’s Canadian Cannabis Investments
Canada’s Island Garden received its sales license for dried cannabis flower back on February 7th, 2017, and in an effort to expand its product offerings leading into October 17th’s recreational legalization kick off in Canada, Canada’s Island Garden recently amended its license with Health Canada to allow the company to sell cannabis oils.
FIGR’s late-stage applicant, Goldleaf Pharm, recently completed the purchase of a 20-acre property adjacent to its facility where it expects to build a greenhouse production facility.
Cannabis Capacity Expansions
In February, Canada’s Island Garden had a small 20,000 square foot indoor growing facility in Charlottetown, Prince Edward Island. Then, in May, Canada’s Island Garden announced a $35 million CAD “state-of-the-art expansion” which included a 166,000-square-foot greenhouse and 54,000-square-foot warehouse. The warehouse is being constructed to also accommodate Phase 2 of the expansion, which would add an additional 90,000 square feet of greenhouse space.
Phase 1 will increase the facility’s annual production capacity from 1,200 kilograms to 18,000 kilograms and is expected to be complete in spring 2019. Assuming completion of Phase 2, Canada’s Island Garden would have a total annual production capacity in excess of 35,000 kilograms.
Not to mention, Pyxus International’s licensed producer applicant, Ontario-based Goldleaf Pharm, has an existing 20,000 square foot indoor growing facility as well. While it is tiny right now, three-year plans are in motion to expand it for an additional 710,000 square feet of production hence the recent 20-acre parcel of land it purchased adjacent to its facility.
Conclusion
Even if all of the planned expansions mentioned above were to be completed, the two licensed producers are minuscule compared to other L.P.s like Canopy Growth and Aurora Cannabis Inc. (TSX:ACB) (OTC:ACBFF).
What is perhaps most significant about Pyxus’ investment in the cannabis industry is the smart timing. As global tobacco use is on the decline, the cannabis legalization wave has just gotten started. The company’s exposure to the U.S. CBD industry comes at a great time as well.
Other tobacco companies will surely be looking to follow in the footsteps of Pyxus as they get squeezed out of the e-cig market by JUUL and pushed out of favor in the traditional cigarette market due to their negative health effects.
In the meantime, Pyxus will be hedging its tobacco bets with bud, creating the investment version of a spliff.
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