CannabisNewsWire
Editorial Coverage: Cannabis companies are using increasingly
refined acquisition tactics to create vertical integration.
TransCanna Holdings Inc. (CSE: TCAN) (XETR: TH8)
(TCAN
Profile) has developed a refined acquisition strategy,
assessing more than one hundred targets before settling on a select
few to acquire. Cresco Labs Inc. (CSE: CL) (OTCQX:
CRLBF), one of America’s leading multistate cannabis
companies, has recently announced its agreement to acquire
CannaRoyalty Corp. (OTCQX: ORHOF), giving it
control over a vast distribution platform. In Canada, HEXO
Corp. (TSX: HEXO) (NYSE American: HEXO) has been given
approval to acquire Newstrike, as the country’s vibrant industry
consolidates following recent dramatic growth. For those without
vertical integration, companies such as DionyMed Brands
Inc. (CSE: DYME) (OTCQB: DYMEF) provide vital support
services, including logistics and distribution.
- The cannabis industry is worth tens of billions of dollars and
expected to reach more than $146 billion by 2025.
- Legal and social changes mean that companies are working to tap
into larger consumer bases.
- Acquisitions create opportunities for integration and
efficiency.
To view an infographic of this editorial, click here.
Cannabis Consolidation
The cannabis industry is going through a period of
transformation. As more jurisdictions around the world legalize
some form of products — whether it’s recreational cannabis, medical
cannabis or CBD — the market is seeing explosive growth. Global
spending on legal cannabis, which was worth $14.3 billion in 2016, has been predicted to reach
$146.4 billion by the end of 2025. This means
big profits and big growth for leading cannabis companies, which a
decade ago looked like strange novelties to wary investors.
The growth of the industry and in particular some bigger players
has led to a period of consolidation. Smaller firms are being
swallowed up by their larger competitors as business leaders and
investors seek economies of scale, greater brand reach and the
higher profits these can bring. From an industry defined by
small-scale production and experimentation, cannabis is turning
into one of big brands powered by mergers and acquisitions.
Getting Acquisition Right
For those involved in the cannabis industry, it’s easy to get
sucked into a gold-rush mind-set. The slightest whiff of marijuana
promises fat profits, and every company with a leaf logo looks like
a sure thing. But as in any sector, one can find both good and bad
options for purchase and investment. For companies set on a
strategy of mergers and acquisitions, such as TransCanna
Holdings Inc. (CSE: TCAN) (XETR: TH8), it’s just as
important to be smart as it is to be buying.
Having performed a successful IPO on January 9, 2019, TransCanna
is still a relatively new player in the market — but one that
appears to be well positioned to make the most of both big markets
and industry expertise. Headquartered in Canada, the only G7
country to have nationally legalized recreational cannabis,
TransCanna has access to the talent pool and wealth of expertise
that Canada has developed. The company has developed a two-year,
four-phase plan aimed at developing proprietary brands and creating
a self-contained ecosystem that ensure reliability, consistency,
quality and scale.
At present, the cannabis industry is in turmoil. Production,
branding and distribution are often carried out separately or by
small companies, each reaching a fraction of their potential
market. TransCanna’s strategy is built around using vertical
integration to create a closed-loop cannabis ecosystem, one which
more efficiently taps into this exciting market.
To create this integrated system, the company recently purchased
a 196,000-square-foot vertically integrated, cannabis-focused
facility, which recently went through an $8-million renovation. In
addition, the acquisition included five additional acres adjacent
to the facility. Once required licenses are in place and the
facility is operational, TransCanna will have the following
divisions: nursery, cultivation, manufacturing, bottling,
extraction and distribution. The facility is also designed to allow
up to 10,000 square feet for a third-party, laboratory-testing
company to lease space.
Strict Vetting
Over the past 18 months, TransCanna has evaluated more than 100
Californian companies with an eye to acquisition. Strict vetting
has whittled these options down to a handful of qualified deals,
which TransCanna’s leadership team is pursuing. The company’s
evaluation process is deliberate and selective, with an eye to
ensuring that every addition plays an essential part in
TransCanna’s long-term strategy.
It appears the company’s extreme due diligence on each potential
transaction is paying off. In the past 30 days, TransCanna has
announced two significant acquisition targets with signed LOIs:
Lyfted Farms and SolDaze. It
is reasonable to assume more acquisitions are in the works that,
conditional upon closing, could certainly bring top-line revenue
into the company before year end.
Quality Control
One of these recent acquisitions is also indicative of what
makes for a good addition to a cannabis company in the current
climate. Lyfted Farms, based in Modesto, California, is another
indoor cannabis producer. The company’s three state licenses allow
the production and distribution of cannabis from its facility.
TransCanna has signed a letter of intent to acquire the company’s
business and assets, adding them to its existing operations.
“The proposed acquisition includes an exceptional brand, with a
range of high-end flower, growing revenues, fifty exotic and unique
genetic strains and a team that’s been a staple in the Modesto
valley with over two decades of cultivating experience,” said TransCanna CEO Jim Pakulis. “In short, this is
another example of an ideal acquisition candidate for TransCanna
that offers SKU velocity, growing revenues and branded products
that differentiate from others in the marketplace.”
That focus on quality plant strains is important for TransCanna.
Cannabis consumers value quality in their products, and the
legalization of the market makes it easier to measure and control
this. While the feeding and facilities in which it is cultivated
will affect a plant’s outcome, good breeding stock is the
fundamental element that will determine its quality. With a variety
of great strains in its arsenal, TransCanna will be better placed
to expand its vertically integrated cannabis business.
Expansion Across the Cannabis Sector
Another company with a vertically integrated approach to
cannabis, Cresco Labs Inc. (CSE: CL) (OTCQX:
CRLBF) is one of the leading multistate cannabis companies
in the United States, a country where federal laws make it
difficult to operate across state boundaries. The company covers
the whole value stream of cannabis, from cultivation through
processing, packaging and shipping, to sales in dispensaries across
the country, some of them owned by Cresco itself. Thanks to its
worker-friendly approach, the company has been earning positive
publicity for the cannabis sector and was recently singled out as
one of the best workplaces in Chicago for
employees.
To expand its interstate operations, Cresco recently announced
its agreement to acquire CannaRoyalty Corp. (OTCQX:
ORHOF), which does business as Origin House. A leading
distributor and provider of support services for cannabis companies
in California, Origin House will provide Cresco with a vast
distribution platform, giving it greater reach across California
and expertise and experience in distribution. Origin House adds to
the company’s ability to retain control of its business from
growing facilities all the way to customers’ hands.
Across the border in Canada, HEXO Corp. (TSX: HEXO)
(NYSE American: HEXO) has also been pursuing an
acquisition strategy. Having entered the cannabis market as a
medical provider, the company has added the recreational market to
its work, thanks to Canada’s groundbreaking national legislation
last year. HEXO announced earlier this year that it will be
acquiring Newstrike, the parent company of Up Cannabis Inc., a
licensed producer and distributor of cannabis. With the acquisition having received regulatory
approval, the companies are set to bring their business
together, expanding HEXO’s already impressive work.
For cultivators without TransCanna and Cresco’s level of
integration, companies such as DionyMed Brands Inc. (CSE:
DYME) (OTCQB: DYMEF) provide essential support services.
DionyMed provides value-added services such as logistics, software,
packaging and distribution. Rather than acquiring other companies,
DionyMed is adding to its value by striking deals with them. The
company has recently signed a multimillion-dollar
with Blue Kudu, giving DionyMed an exclusive multistate
position as distributor for Blue Kudu’s award-winning edibles.
Deals with other cannabis companies can help producers and
distributors expand. But acquisitions seem to be the key to real
integration and are likely to create cannabis’s future
powerhouses.
For more information on TransCanna Holdings, visit TransCanna
Holdings Inc. (CSE: TCAN) (XETR: TH8)
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