CannabisNewsWire
Editorial Coverage: A wave of acquisitions is sweeping the
cannabis sector, as increasing legalization draws the attention of
big business.
- Large and mid-tier cannabis companies are absorbing their
smaller competitors.
- Tobacco and alcohol companies are moving in as a natural
extension of their current ranges.
- This is supported by growth not just among cannabis growers but
also for businesses supporting them.
Cultivation supplies company Sugarmade, Inc. (OTC: SGMD)
(SGMD
Profile) has recently announced the acquisition of
hydroponic product companies that could more than double its
revenue. Tilray, Inc. (NASDAQ: TLRY) is fueling
expansion through an initial public offering as it begins its first
sales of CBD oil products in the United Kingdom. Drinks giant
Constellation Brands now owns a large chunk of Canopy
Growth Corp. (NYSE: CGC), one of Canada’s largest cannabis
companies. GW Pharmaceuticals Plc (NASDAQ: GWPH)
is releasing fresh shares to fund its R&D-driven growth.
Meanwhile, Aurora Cannabis, Inc. (OTCQX: ACBFF) is
making acquisitions across the Atlantic, buying out a pair of
European hemp companies.
To view an infographic of this editorial, click here.
Acquisitions Grow in Cannabis Sector
Twenty years ago, it would have sounded like a science fiction
fever dream, but today the cannabis industry is one of the
fastest-growing sectors in the North American economy. The nine
U.S. states where recreational cannabis is legal are about to be
joined by the entire country of Canada, while another 20 states
have legal markets for medical marijuana. Businesses catering to
these markets are going from strength to strength, whether selling
cannabis, manufacturing products derived from it or providing the
tools and support that growers need.
This has led to a flurry of mergers and acquisitions in the
cannabis sector. At the top end, large companies from other sectors
have started buying into cannabis. Beverage manufacturer
Constellation Brands owns more than a third of the shares in Canopy
Growth, Molson is working with Hydropothecary, and Phillip Morris
has been talking about moving into the sector. Seeing another legal
drug coming into play, tobacco and alcohol companies want to buy
their part of the future.
And there’s also been a lot of movement within the industry.
Cannabis Companies Buy Up Competitors
Among existing cannabis companies, consolidation is the name of
the game. A wide scatter of small companies — startups created
within a new and uncertain industry — are combining into larger
operations.
One example is a recent series of acquisitions by
Sugarmade, Inc.
(OTC: SGMD). A Los Angeles company with warehouses in
southern California, Sugarmade isn’t a purely cannabis-oriented
business, but its work in restaurant supplies and packaging is
increasingly taking a back seat. Its higher profile work is in the
cannabis sector, where it provides cultivation supplies.
Sugarmade isn’t one of the big players in cannabis, but it has
made bold moves for a mid-tier company. Following an SEC filing
earlier this year, the company has recently made formal proposals for the acquisition of two
hydroponic supply companies catering to the cannabis sector.
These acquisitions would more than double Sugarmade’s expected
revenue for next year, from $30 million to $75 million.
Even within the cannabis industry, this is an unusual move. Most
of the mergers and acquisitions are being led by big companies, who
can obtain external investment to drive their expansion. It’s a
familiar case of success breeding success, as the largest companies
are most able to grow. But Sugarmade is bucking that trend in a
move that could see it join the big players, disrupting the status
quo of the cannabis industry.
“These acquisitions will not only very significantly boost our
top line revenue growth, but will also expand our distribution
across the most important sectors of the fast-growing cannabis
marketplace,” said Sugarmade CEO Jimmy Chan. “In addition to the
revenue growth opportunities, we will also be afforded very
meaningful cost savings across many operational functions. In
particular, we believe there are strong cost synergies relative to
manufacturing, purchasing, international transport, warehousing and
shipment to customers. Perhaps most exciting, however, is that
these acquisitions will place us among the largest public companies
in the booming cannabis sector.”
It’s a strategy that brings a lot of obvious advantages. Greater
integration smooths out supply chains and increases efficiency,
reducing overheads to improve profits. It increases a company’s
ability to bring specialist expertise in house. It increases a
company’s influence in negotiating with suppliers and customers, as
well as in lobbying authorities.
But in a sector where mergers are likely to continue, it also
has another effect. As the big players in tobacco and alcohol look
for cannabis businesses to buy, Sugarmade’s growing strength
improves its bargaining position. Whether the company aims to be
bought up or to hold onto its independence, it will be better able
to negotiate from a place of strength.
Supporting Services
Talk about the cannabis industry usually focuses on the
cultivators and distributors, those directly dealing with cannabis.
But over the past decade, the industry has grown far more diverse.
Support companies such as Sugarmade play an increasingly important
role.
The most obvious support services are those supplying
cultivation equipment. This is where Sugarmade’s main business
lies, selling growers the tools they need to produce their
crops.
Hydroponics, the growth of plants in water-based nutrients
instead of soil, is an important part of this. Used to grow
high-quality plants in indoor facilities, this method is central to
the cultivation of controlled, high-quality cannabis crops in
secure conditions. Hydroponic sales have allowed Sugarmade to
expand beyond North America and into the European
market, where cannabis is still largely illegal but its
cultivation tools have other uses. The companies Sugarmade is
buying also work in
hydroponics and their acquisition could make the company a
major player within that market.
Support services for cannabis are increasingly diverse.
Equipment for waste disposal, lighting and growing beds are all
important. Some of this is provided by hydroponics companies, while
other components are created by specialist firms. Seeds are
nurtured and sold, new plant strains grown, and growing and
harvesting techniques developed. Research and financial services
specifically geared toward cannabis add to a complex and
multifaceted industry.
The Potential for Growth
Much as its opponents might disagree, the cannabis industry
isn’t going away. In the United States, where Sugarmade is based,
the industry shows every sign of continuing its rapid growth.
The biggest driver for growth is still legal change. The
legalization of both medical and recreational cannabis has been
spreading state by state, as increasingly liberal attitudes are
reflected in the law. Though cannabis remains illegal at the
federal level, the government has done nothing to clamp down on
these efforts by states. If anything, the government’s attitude is
softening, with this year’s Farm Bill set to legalize industrial
hemp, a nonpsychoactive form of cannabis.
Industrial hemp is already being grown in test projects in the
United States, creating impressive profits for the farmers
involved. While its cultivation often operates differently from
that of medical and recreational cannabis, it relies on much of the
same knowledge and many of the same tools. For companies such as
Sugarmade, which provide cultivation supplies, industrial hemp will
mean significant opportunities for growth.
On top of this, there’s the long-term growth expected from
cannabis companies within the states that have legalized their
products. As the legal consumer market settles in, the habits of
cannabis consumers will change. They’ll move away from buying from
criminals, undermining illegal networks and giving more business to
the legal companies. As these companies expand production
facilities, the need for additional equipment and supplies will
increase – supplies that can be provided by Sugarmade and the
companies that it’s absorbing.
Many North American cannabis companies are seeing substantial
growth. Tilray, Inc. (NASDAQ: TLRY) is looking to
finance its ongoing expansion through initial public
offerings in the United States and in Canadian provinces. A
leading medical marijuana company, Tilray has sold its products to
customers on five continents and is one of the first companies to
sell CBD oil, a cannabis derivative, in the United Kingdom. Its
expansion is driven not by acquisitions but by a strong research
and development program.
Canopy Growth Corporation (NYSE: CGC) is one of
the largest cannabis companies in Canada. Drinks manufacturer
Constellation Brands has pumped over $4 billion into
Canopy Growth, and the American giant now owns more than a
third of Canopy Growth’s shares. It’s a move that will help the
companies to collaborate in producing cannabis-infused drinks,
which will become legal in Canada next year. More than this, it’s a
move by a drinks manufacturer to get a foothold in cannabis and so
expand from alcohol into another legal drug.
GW Pharmaceuticals Plc (NASDAQ: GWPH) has been
growing through new products and research, with the creation of the
first FDA-approved prescription medicine derived
from cannabis plants. It has just announced the release of new
shares, which are expected to raise $300 million in support of the
company’s ongoing growth.
Aurora Cannabis, Inc. (OTCQX: ACBFF) is going
international with its latest acquisition. In September, the
company acquired Europe's
largest producer of organic hemp, Agropro UAB, and hemp processor
and distributor Borela UAB. This will increase the company’s
production of hemp-derived health and wellness products around the
world.
With the cannabis industry expanding, mergers and acquisitions
are helping to drive a round of growth, creating companies with the
power to compete on the global stage.
For more information on Sugarmade, visit Sugarmade, Inc.
(OTCQB: SGMD)
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