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Rapid Consolidation Phase Presents Opportunity for Cannabis Companies to Expand

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NEW YORK, June 4, 2019 /PRNewswire/ -- The cannabis industry has seen an explosion of mergers and acquisitions over the past year. Major companies have been competing amongst each other for the most attractive deals, often paying premiums in the process to make their offers more appealing. Cannabis companies such as Aphria Inc. (TSX:APHA)(NYSE:APHA), HEXO Corp (TSE: HEXO)(NYSE:HEXO), The Supreme Cannabis Company (TSX:FIRE)(OTC:SPRWF), Curaleaf Holdings Inc. (TSX:CURA) (OTC:CURLF) and Green Growth Brands Inc. (OTC:GGBXF)(CSE:GGB) have all been major players in the world of cannabis mergers and acquisitions.

Marijuana remains illegal federally in the U.S., with different states having different rules and often a limited number of licenses, entering these markets can pose a challenge. Instead, acquisitions have become an easier, more cost-effective way for major cannabis businesses to expand.

The Growing Trend of Cannabis Acquisitions

Mergers between publicly traded cannabis companies have become increasingly common over the past six months. Back in early 2019, Aphria Inc. made news when it received a hostile takeover offer from Green Growth Brands Inc. (OTCQB:GGBXF)(CSE:GGB). While this was one of the few deals which didn't go through, it signified a change in the market with cannabis companies choosing to expand through takeover offers.

Since then, cannabis companies have exploded in size and number, leading to an overabundance of businesses that in another market climate would be difficult to justify. Looking at Canada, there are 168 companies[1] with cannabis licenses, while only 50 of them are publicly traded. Most of these businesses will likely fade away in time as they struggle to compete and justify the hefty valuations they've received from investors.

Often, it's easier for a local business or dispensary chain to team up with a larger player than to try and compete by itself. Spring Oaks Greenhouses, a Florida-based dispensary chain which owns over 35 locations, agreed to an acquisition offer from Green Growth Brands Inc. (GGBXF-GGB). The offer, valued at around $54 million[2] in both cash and stock, represents a significant win for both parties. Green Growth Brands Inc. (GGBXF-GGB) has been eyeing an opportunity to expand into the lucrative Florida market for a while now. Spring Oaks Greenhouses, on the other hand, faces stiff competition from some of the other major brands competing in the state, and the agreement would give it a competitive edge over its rivals.

"The market has one significant retailer and we feel very comfortable that we can provide a superior customer experience," said Peter Horvath, Green Growth Brands' CEO. "We have made the strategic decision to turn our focus to Florida, where we can grow our presence and brand recognition across the state at scale."

While these acquisitions often focus on expanding a company's physical, brick-and-mortar retail presence, the market also sees acquisitions focused on adding production facilities or purchasing well-known brands. The Supreme Cannabis Company completed at C$48 million[3] purchase of one of the top, premium wellness-focused cannabis brands in the world. At the same time, they also will be adding an 18,000 square foot, high-tech facility to their asset portfolio.

While these types of deals might seem common, acquisition targets often get plenty of offers and are willing to wait for the right deal. In the case of Green Growth Brands' Inc. (OTCQB:GGBXF) (CSE:GGB), their ability to secure these acquisitions comes down to what they can bring to the table as well. Their management team is one of the few in the industry that has an extensive history working in traditional retail-focused environments. For local businesses with heavy retail presences, having this kind of specialized background makes a big difference in choosing which of the many MSOs to work with.

Recent Acquisitions

Management teams of major companies are well aware of the importance of expanding while they still can, as the best opportunities are likely to be gobbled up within the next year or so. Companies that get an early start at the M&A competition have the best chance of remaining strong as the redundant companies weed themselves out.

Even relatively major cannabis companies, such as HEXO Corp, were considered to be a possible acquisition target at one point. In an interview with the Montreal Gazette last year, HEXO's CEO Sebastien St. Louis noted that the company was for sale for the right price. Since then, the company has gone on to acquire other, smaller companies such as the recently announced acquisition of Newstrike Brand Ltd, the parent company of Up Cannabis Inc. licensed to both cultivate and sell cannabis in all acceptable forms.

This trend is especially true in the U.S. market, where multi-state operators (MSOs) face regulatory hurdles when trying to expand into other states. Not only do some jurisdictions issue only a restricted number of licenses, but there's also often a preference to give these permits to local businesses rather than competing MSOs. As such, cannabis companies looking to expand into other states have an easier time just acquiring a local competitor than trying to enter the state on their own.

Arizona is one of those states. As MSOs fiercely compete amongst each other for a limited pool of assets and licenses, it's not surprising to see hefty premiums get thrown around. Curaleaf Holdings Inc. recently managed to secure a key dispensary in the state, paying a lofty $18 million[4] for the acquisition. These kinds of premiums have quickly become the norm as companies scramble to acquire local assets in hot markets.

In other states like Florida, this restrictiveness in the number of licenses has led to an underrepresentation's of cannabis providers. Despite having 200,000[5] enrolled medical cannabis patients, with an extra 10,000 registering each week, Florida only has 14 license holders with around 119 dispensaries. MSO's that do manage to break into these markets will have set themselves up for success, and acquisitions remain the easiest way of entering another state.

Further Cannabis Developments

Earlier in May, The Supreme Cannabis Company (TSE:FIRE)(OTCQX:SPRWF) saw itself acquire a fair bit of media attention. Speaking on BNN Bloomberg, James Hodgins, president and CIO of Curvature Hedge Strategies, said that the cannabis company was among the top quarter of all producers in terms of management.

Aphria Inc. (TSE:APHA)(NYSE:APHA) issued a press release earlier in May announcing a number of key executive appointments and transitions. Since the company's former CEO Vic Neufeld resigned, Aphria has shuffled their executive team around significantly following a corporate transparency scandal earlier this year.

Another major acquisition in the cannabis world came when HEXO Corp (TSE:HEXO) (NYSE-A:HEXO) announced they would be acquiring Newstrike Brands. Reporting that they finally finished the transaction in May, HEXO now has ownership of all common shares. The deal is expected to increase HEXO's distribution footprint across Canada.

Curaleaf Holdings Inc. (TSE:CURA)(OTCQX:CURLF) joined many other cannabis companies in announcing their Q1 financial results. Total revenue increased by 288 percent year over year to $35.3 million, while net losses settled at $10.9 million in the first quarter. The company also opened seven new dispensaries in Florida, New York, and Maryland, which was one reason for the growth in revenues.

As the cannabis industry expands through mergers and acquisitions, the ability to secure these acquisitions comes down to what they can bring to the table. Companies like Green Growth Brands' Inc. (GGBXF-GGB) with a lot to offer are ultimately best poised to expand and stay ahead of the curve.

For a FREE research report on Green Growth Brands (OTCQB:GGBXF) (CSE:GGB), visit www.potstocknews.com 

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[1] https://www.forbes.com/sites/alanjbrochstein/2019/04/07/mergers-and-acquisitions-light-up-the-cannabis-sector/#6a292aae887e

[2] Press Release DRAFT provided by Farah (sum came from adding up cash, stock, and other payments together)

[3] https://www.newswire.ca/news-releases/supreme-cannabis-to-acquire-premium-wellness-cannabis-company-blissco-818409573.html

[4] https://www.newswire.ca/news-releases/curaleaf-announces-acquisition-of-sixth-dispensary-in-arizona-828480679.html

[5] https://mjbizdaily.com/chart-florida-medical-cannabis-market-companies-dominating/

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SOURCE Potstocknews.com

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