With legalization of cannabis on the horizon in Canada, the multi-billion-dollar marijuana industry has officially entered its consolidation phase.
Late last year CBC News signalled the cannabis industry’s entry into a state of merger madness, and now the Financial Post has confirmed that this is indeed the way that 2018 is starting.
Multi-billion dollar cannabis giants such as Aphria Inc. (TSXV: APH) (OTC: APHQF), and Aurora Cannabis (TSXV: ACB) (OTC: ACBFF), are actively seeking positions in or attempting to outright acquire all types of mid-tier and junior companies including CanniMed Therapeutics (TSX: CMED) (OTC: CMMDF), and DOJA Cannabis Company Limited (CSE: DOJA) (OTC: DJACF).
The recent series of mergers seemingly started with the takeover attempt by Alberta-based Aurora Cannabis (TSXV: ACB) (OTC: ACBFF) of Saskatchewan-based CanniMed Therapeutics (TSX: CMED) (OTC: CMMDF) seen as hostile by some camps, and not-so-hostile by others.
CanniMed responded with an acquisition of its own through a deal with Newstrike Resources Ltd.—in a move that Aurora called “bizarre”.
Aurora hasn’t been stalled by CanniMed’s perceived resistance to its acquisition, as it went on to ink a $55-million deal to buy a stake in The Green Organic Dutchman Holdings Ltd. (TGOD) that could incrementally lead to a 51% share.
On an even friendlier scale, another cannabis giant in Aphria Inc. (TSXV: APH) (OTC: APHQF) led a $12.5 million private placement for leading cannabis-lifestyle experts DOJA Cannabis Company Limited (CSE: DOJA) (OTC: DJACF).
However, with $22.6 billion market projected in Canada alone at stake, and with several major cannabis companies cashed-up and hungry to grow through M&As, we will be seeing more of a shuffle as legalization officially approaches.
The result will be an inter-mingling of cannabis companies of all sizes, including Aphria Inc. (TSXV: APH) (OTC: APHQF), Aurora Cannabis (TSXV: ACB) (OTC: ACBFF), and CanniMed Therapeutics (TSX: CMED) (OTC: CMMDF), and DOJA Cannabis Company Limited (CSE: DOJA) (OTC: DJACF).
THE INEVITABILITY OF M&A
Consultancy Ernst & Young surveyed nearly a dozen licensed producers (LPs) late last year, predicting many takeovers and mergers to come in the months ahead of legalization.
"Many believe that consolidation is inevitable, leaving a few large players post-legalization," declared Ernst & Young in the report titled Insights and perspectives from Canada’s cannabis industry leaders. "Inorganic growth is expected to persist, leaving a few large players."
Former Aurora board member and founder and CEO of Tweed Inc. (now Canopy), Chuck Rifici perceived the high stock values being given by the market compels the major companies gobble up smaller players in all-stock deals.
"It makes sense to do deals where you're buying optionality in a future market for not much in stock," Rifici told CBC news.
"These smaller companies are in a position to fill in gaps and get a nice premium on their stock and the larger guys are essentially printing cheap paper to do those deals. It's win-win."
All of Canada’s billion-dollar-plus cannabis majors have at some point made a significant acquisition or merger in the past 18 months—They’re very well-funded to do so.
The Aurora/CanniMed/Newstrike saga was the first of many acquisition attempts to come. However, the market should watch for more friendly deals, like that of Aphria and DOJA.
APHRIA FEEDING DOJA’S ORGANIC EXPANSION
With the added injection of capital from the Aphria-led private placement, DOJA Cannabis Company Limited (CSE: DOJA) (OTC: DJACF) becomes one step closer to significantly expanding its production capabilities.
In October, DOJA announced its ambition to expand its production capacity by acquiring and refitting a 22,580 sq.ft. Kelowna, BC building to be dubbed the “FUTURE LAB.”— destined to produce over 5,000 kgs of cannabis per year.
“Our strategy has always been to reach 5,000 kg of cannabis production per year by the end of 2018, with the addition of the FUTURE LAB we project we will reach or goal in less time and for less capital investment than previously budgeted. The FUTURE LAB has 325 feet of highway frontage which will be utilized to promote DOJA’s cannabis lifestyle brand to the 1.9 million plus visitors to the Okanagan each year and the 40,000 commuters that drive past the facility each day,” said DOJA Founder and CEO of DOJA, Trent Kitsch upon the announcement.
Once completed, FUTURE LAB will expand DOJA’s production capacity by almost 8 times.
DOJA was granted an import permit for seeds in December and the company is busy diversifying their strain production. The FUTURE LAB allows DOJA to integrate an extraction lab, while leveraging the economies of scale that come from a larger growing-space.
However, DOJA’s own merger with Tokyo Smoke may have been a bigger acquisition than the FUTURE LAB facility itself. For it was through the Tokyo Smoke merger into a new combined company called Hiku, that DOJA gained its first official attachment with Aphria.
As DOJA goes on to strategically grow its production capabilities, as well as incorporating extraction technology on-site, it will either become its own giant entity like Aphria, or be a perfect example of the type of company that the giants will eventually be compelled to takeover.
M&A-READY COMPANIES OF NOTE
Aphria Inc. (TSXV: APH) (OTC: APHQF)
Aphria is one of Canada’s lowest cost licensed cannabis producers, specializing in the production, suppy, and sale of medical cannabis. The company offers sativa, indica, and hybrid medical marijuana products, as well as cannabis oils. It also provides support services in the form of medical consultations, group therapies, and rehabilitation to veteran and first responders. The company sells its products through its online store or phones, as well as engages in the wholesale shipping of medical marijuana plant cuttings and dried buds to other licensed producers. Aphria Inc. is headquartered in Leamington, Canada.
Aurora Cannabis (TSXV: ACB) (OTC: ACBFF)
Aurora Cannabis boasts the second highest square footage approved for cannabis production in Canada. Together with its subsidiaries, Aurora produces and distributes medical marijuana products in Canada. The company’s products consist of dried cannabis and cannabis oil.
Aurora is the only cannabis producer located in the province of Alberta, giving the company a cost advantage through its free use of fresh mountain-fed water used on site, and housed under the lowest corporate tax rates and power rates in Canada. Capitalizing on numerous farm credit programs provided by the province, Aurora has positioned itself as arguably the lowest cost-per-gram licensed producer in Canada. Aurora became a licensed producer in 2015, and is based in Edmonton, Alberta.
CanniMed Therapeutics (TSX: CMED) (OTC: CMMDF)
CanniMed operates as a plant biopharmaceutical company, specializing in medical cannabis. It offers a plant biotechnology R&D development program that focuses on the production of plant-based materials for pharmaceutical, agricultural, and environmental applications. The company provides medical marijuana for Canadian patients. CanniMed Therapeutics Inc. was founded in 1988 and is based in Saskatoon, Canada.
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