CannabisNewsWire
Editorial Coverage: A growing market is supporting a wave of
acquisitions and cross-company investments in the cannabis
industry.
- Significant growth in the cannabis industry is supporting a
range of multimillion-dollar investments.
- Some of these have taken the form of acquisitions, as
innovators evolve into established companies.
- Others are cross-company investments, some within the sector
and some from outside.
- Profits are coming not just from cannabis itself but from
support services, with companies profiting from pick-and-shovel
plays.
One of the companies making a pick-and-shovel play is
Sugarmade, Inc. (OTCQB: SGMD) (SGMD
Profile), which is expanding its position in
cultivation supplies through acquisitions and marketing agreements.
GW Pharmaceuticals Plc (NASDAQ: GWPH) recently
carried out a public offering to fund further growth, raising $345
million to expand its cannabis-oriented pharmaceuticals work.
AbbVie, Inc. (NYSE: ABBV), on the other hand, has
retained only a limited connection to cannabis, moving instead into
other treatments. Specialist consulting company MariMed,
Inc. (OTCQB: MRMD) provides advice for those looking to
expand in the sector, covering the development and management of
cultivation facilities, and recently investing in a related
software company. For Medmen Enterprises, Inc. (OTCQX:
MMNFF) (CSE: MMEN), expansion means a vertically
integrated supply chain across four US states as it expands a
carefully developed brand.
Cannabis Acquisitions Continue as Companies Seek
Liquidity
With the completion of cannabis legalization in Canada,
investors are watching closely to see what effect this will have on
the market. Over less than 20 years, cannabis has evolved from
nothing into a multimillion-dollar industry, with companies ranging
from cultivators and retailers to payment specialists and equipment
suppliers. As it continues to expand at a rapid rate in both Canada
and the US, the market is seeing growth for players both big and
small.
To fuel this development, many companies are looking for fresh
finance. Liquidity is needed to fund research, development, and
expansion, from building larger cultivation facilities to setting
up new retail outlets. This is both driven by and driving a wave of
new finance deals and acquisitions, as the sector matures and
consolidates its resources.
Acquiring the Fundamentals
The appeal of acquisitions is driving the strategy of companies
such as hydroponics supplier Sugarmade, Inc. (OTCQB: SGMD).
Hydroponic equipment is essential to the indoor cultivation of
cannabis, so the growth of the sector promises a boom in demand for
hydroponics. Sugarmade is using this boom to attract additional
finance and undertake a raft of acquisitions, with an end goal of
becoming a major player not just in hydroponics but in the cannabis
space itself.
Such acquisitions have taken off in a big way over the past
year. The first half of
2018 saw 145 mergers and acquisitions in the cannabis sector,
nearly double the number for the same period in 2017. Some of these
represent consolidation by existing cannabis players, as they
mature from innovative startups into established businesses in a
widely accepted field. But money is also coming in from the
outside, for example through Constellation Brands’ acquisition of a large portion of Canopy Growth.
A pattern is emerging of cannabis-adjacent companies moving
directly into the sector. For a company such as Constellation, the
move is a sideways one from investment in alcohol to one in
cannabis, protecting its place in the recreational consumables
market. It’s the same play that other alcohol and tobacco companies
are eyeing. For Sugarmade, acquisitions represent expansion within
its existing business, ensuring a firm hold on hydroponics, as well
as a move up and down the supply chain to better profit from the
businesses it is already tied to.
A Pick-and-Shovel Strategy
Earlier this year, Sugarmade announced that it was moving to acquire two other suppliers of cultivation
equipment. Now details of those deals are emerging, with the
signing of a binding Letter of Intent ("LOI") to
acquire Sky Unlimited, LLC. This could allow Sugarmade to
expand its distribution channels, thanks to the different models
followed by the two companies. While Sugarmade’s sales to the
cannabis sector primarily come through online buyers, Sky Unlimited
specializes in selling to wholesalers and large commercial
cultivators. Combining the two may create manufacturing,
logistical, and marketing efficiencies across an expanded customer
base.
"The trend in cannabis cultivation is toward the larger
commercial cultivation operations, and Sky Unlimited is in the
thick of that dynamic marketplace," said Jimmy Chan, CEO of
Sugarmade. "This year, Sky Unlimited and its associated operations
are expected to produce in excess of $40 million in revenues with
profitability and positive cash flow. This new revenue stream
combined with our recently upwardly guided revenue forecast of $30
million for next year will make Sugarmade one of the largest
publicly traded suppliers to the booming cannabis cultivation
marketplace, with a combined revenue forecast for next year in
excess of $70 million."
The types of company being targeted by Sugarmade reveal a
pick-and-shovel strategy. Rather than making a direct jump into
cannabis, the company is investing in the underlying products and
services cannabis suppliers need. It’s a more conservative move
than investing directly in cannabis, one that will buffer Sugarmade
against the immediate effects of a fast-changing and still
controversial sector, while letting it profit from the sector’s
growth.
Following a previous Master Marketing
Agreement with BizRight, this latest move makes Sugarmade one
of the largest publicly traded cannabis supply companies. The
company shows no sign of stopping there, having announced its
intention to continue with an expansion strategy. The next likely
move may well be brand acquisition, providing a higher
price-to-earnings ratio for investors. Having already made an
acquisition proposal for a Washington state
retailer with $5 million in annual revenues, Sugarmade is on
its way to becoming a more public fixture in the cannabis
market.
Financing Growth in Cannabis
As in any sector, the success of expansion strategies will
depend upon their liquidity. Fortunately, the state of the cannabis
market appears to currently ensure a steady stream of finance. The
US cannabis market alone is expected to be worth
$10 billion in 2018, 50 percent more than it was only two years
ago. Canada’s market is also expected to be worth billions, as
legalization transfers the recreational consumer base from illegal
dealers to legitimate businesses.
Cannabis companies are using this opportunity to channel finance
into growth. Some are striking deals for bank loans in newly
legalized regions, while others are using public offerings to raise
fresh finance through sales of shares.
Sugarmade is taking a different approach, using expansion to
fund further expansion. Following the BizRight and Sky Unlimited
deals, the company has upgraded its projections for revenue in 2019
from $6 million to $70 million. Its previous deals will now provide
the liquidity for future acquisitions, allowing a rolling strategy
of expansion across the sector.
The pick-and-shovel plays look to pay off.
Cannabis Companies Making Big Moves
As the market keeps growing, so do many of the companies working
in cannabis.
GW Pharmaceuticals Plc (NASDAQ: GWPH) is a
world leader in the development of cannabis-related medicines,
thanks to its strong research program and manufacturing expertise.
Already a major player in the sector, the company has recently
sought funds for expansion through a public offering. The result
was an extra $345 million in
funds, reflecting investors’ faith in the cannabis sector and in
the future of companies such as GW. These funding will allow the
company to keep growing its research and production work, with that
research work expanding its portfolio of cannabis-related
intellectual property.
While some companies invest more heavily in cannabis, others are
diversifying. Pharmaceuticals manufacturer AbbVie, Inc.
(NYSE: ABBV) is the company behind Marinol, a drug used to
tackle appetite loss due to AIDS and cancer treatments. But while
Marinol’s active ingredient is chemically identical to THC, the
best-known active ingredient in cannabis, the company has filed
only a handful of patents relating to cannabis and shows no sign of
expansion into the sector. It’s a move that may help AbbVie in
marketing to cannabis’s opponents, but one that leaves the space
open for competitors.
The expansion of cannabis companies has supported the emergence
of specialist support services, such as those provided by
MariMed, Inc. (OTCQB: MRMD). A cannabis consulting
firm, MariMed provides professional guidance on the development,
funding, and operation of cultivation facilities. This can help
other firms navigate the complicated issues surrounding the
industry, covering everything from real estate to regulatory
compliance. The company recently invested in
Sprout, a software company supporting cannabis brands and
dispensaries, allowing it to bundle software with its other
business solutions.
Medmen Enterprises, Inc. (OTCQX: MMNFF) (CSE:
MMEN), has used expansion to develop a vertically
integrated supply chain. The company works in both cultivation and
retail, meaning that it handles the product all the way from
planting first seedlings to placing packaged cannabis into
customers’ hands. Its recent acquisition of
dispensary and cultivation facilities from Treadwell Simpson
Partnership means that it is spreading its carefully managed
brand from existing bases in California, Nevada, and New York into
Florida.
The growth of the cannabis market is providing a flow of
finance, leading to acquisitions and cross-company investments
across the sector.
For more information on Sugarmade, visit Sugarmade, Inc.
(OTCQB: SGMD)
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