SCHEDULE: BAT Subsidiary Boosts Charlotte's Web Stake to 40.8%

BT DE Investments, a British American Tobacco subsidiary, significantly increases its stake in Charlotte's Web Holdings to 40.8% through a private placement and debenture conversion, gaining enhanced governance rights.

Summary

• BT DE Investments Inc. (Purchaser), a wholly owned subsidiary of British American Tobacco p.l.c. (BAT), is increasing its beneficial ownership in Charlotte's Web Holdings, Inc.
• The Purchaser will acquire 14,760,638 Common Shares in a private placement for C$0.94 per Purchased Share, totaling C$13,875,000.
• Concurrently, the conversion price of an existing C$75,341,080 aggregate principal amount 5.00% senior unsecured convertible debenture will be amended from C$2.00 to C$0.94 per Common Share.
• This amendment will lead to the conversion of the outstanding principal and accrued interest of the debenture into 95,281,277 Common Shares.
• Upon completion of this 'Investment,' the Purchaser will beneficially own 110,041,915 Common Shares, representing approximately 40.8% of the issued and outstanding Common Shares on a non-diluted basis.
• This percentage is based on an expected 269,725,868 Common Shares to be issued and outstanding post-Investment.
• An Amended and Restated Investor Rights Agreement will grant the Purchaser significant governance rights, including the right to nominate up to 40% of the Board of Directors (with a minimum of two nominees) and approval rights over certain Issuer actions.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a mixed development. While the capital infusion and strategic backing from BAT are positive, the significant dilution for existing shareholders and the substantial shift in corporate control towards the Purchaser are notable negatives, potentially limiting upside for current investors.

Positives

• Charlotte's Web Holdings, Inc. will receive a capital infusion of C$13,875,000 from the private placement, providing additional liquidity.
• The conversion of the C$75,341,080 Convertible Debenture into equity will strengthen Charlotte's Web's balance sheet by reducing its debt obligations.
• The strategic investment by a major global company like British American Tobacco provides a strong vote of confidence and potential for future collaboration or strategic support.

Negatives

• Existing shareholders will experience significant dilution, as the Purchaser's beneficial ownership will increase from 19.9% to 40.8% of the company's expanded share base.
• The conversion price of the Convertible Debenture was reduced from C$2.00 to C$0.94 per share, which is a less favorable term for the Issuer compared to the original agreement.
• Existing shareholders will see a substantial reduction in their proportional voting power and control due to the Purchaser's increased ownership and enhanced governance rights.

Future Outlook

The Purchaser intends to review its investment in the Issuer on a continuing basis and may, subject to the terms of the Investor Rights Agreement, depending upon a number of factors including market and other conditions, increase or decrease its beneficial ownership, control, direction or economic exposure over securities of the Issuer through market transactions, private agreements, treasury issuances, exercise of options, convertible securities, derivatives, swaps or otherwise. The Purchaser will also have the right, so long as it maintains certain share ownership thresholds, to participate in future equity offerings of the Issuer.

Industry Context

StockSavvy.ai notes this strategic investment by a British American Tobacco subsidiary into Charlotte's Web Holdings reflects a broader trend of diversification by traditional tobacco companies into the burgeoning CBD and cannabis-related markets. This move could provide Charlotte's Web with significant capital and strategic backing, while offering BAT a deeper foothold in a rapidly evolving consumer segment.

Corporate Governance

Related Party Transactions

• The entire 'Investment' transaction, comprising the private placement of Common Shares and the amendment and conversion of the Convertible Debenture, is a related party dealing. BT DE Investments Inc. already held the Convertible Debenture and is a significant shareholder, making this an agreement between related entities.

Stakeholder Impact

• **Shareholders:** Existing shareholders will experience significant dilution of their equity and a reduction in their proportional voting power and control due to the substantial increase in the Purchaser's ownership.
• **Management/Board:** The Issuer's management and Board will face reduced autonomy and increased influence from the Purchaser, given the new board nomination rights and approval rights over certain corporate actions.
• **Creditors:** The conversion of the Convertible Debenture into equity will reduce Charlotte's Web's overall debt burden, potentially improving its financial leverage and credit profile.

Next Steps

• Completion of the Investment, which includes the Subscription Transaction and the amendment and conversion of the Convertible Debenture.
• The Purchaser and the Issuer will enter into an Amended and Restated Investor Rights Agreement.
• The Purchaser will have the right to nominate one director to the Board prior to the next meeting of shareholders to elect directors.

Key Dates

Recommendation

While the capital infusion and strategic partnership with British American Tobacco offer potential long-term stability and growth opportunities for Charlotte's Web, the immediate impact of significant shareholder dilution and the substantial shift in corporate control to BT DE Investments Inc. creates uncertainty for existing public shareholders. A 'hold' recommendation allows investors to observe how the new governance structure impacts operational performance and strategic direction before making further investment decisions.

Keywords

Charlotte's Web Holdings, CWEB, British American Tobacco, BAT, BT DE Investments, SEC filing, Schedule 13D, Convertible Debenture, Private Placement, Equity Investment, Corporate Governance, Share Dilution, Strategic Investment, CBD, Cannabis Industry