CannabisNewsWire Editorial Coverage: The rapid growth of the cannabis sector is pushing companies to innovate expansion strategies.
- Among the companies affected are hydroponics suppliers, which sell vital equipment to cultivators.
- Hydroponics companies, like others in cannabis, are using mergers and acquisitions to benefit from a bullish market.
- A recent trade show in Las Vegas saw companies on the hunt for future acquisitions.
- Other companies are seeking outside investment or partnerships to increase their presence.
Hydroponics supplier Sugarmade, Inc. (OTCQB: SGMD) (SGMD Profile) has leaned into the current trend for mergers, with a big acquisition and open plans for future growth. Tilray, Inc. (NASDAQ: TLRY) is focusing on research and design, using public offerings to finance this work. Canopy Growth Corp. (NYSE: CGC) (TSX: WEED) has gained $4 billion in investment from a beverage company, an investment some believe will lead to a takeover. Both Cronos Group, Inc. (NASDAQ: CRON) (TSX: CRON) and Aphria (NYSE: APHA) (TSX: APHA) are relying on diverse strategies, including external partnerships, as they look to grow and succeed in the cannabis sector.
To view an infographic of this editorial, click here.
The Industry Behind the Industry
The cannabis industry is experiencing a period of staggering growth, with commentators predicting that it will reach a global value of over $146 billion by the end of 2025. With so much of the industry based on indoor cultivation, hydroponics companies that provide the equipment and nutrients needed to cultivate cannabis have also seen significant growth. As cannabis cultivation increases, so does demand for hydroponics products, so that the fates of the two industries are increasingly tied together.
Given their close relationship, it’s not surprising to see patterns in the broader cannabis sector reflected in the hydroponics industry. A recent surge of mergers and acquisitions among cannabis companies includes a number of moves involving hydroponics companies as players within the industry seek growth while outsiders look for a way in. With a big cannabis trade show coming up in Las Vegas, executives from hydroponics companies will be eyeing up the competition and contemplating who they might buy next.
Mergers, Acquisitions and Hydroponics
Hydroponics companies such as Sugarmade, Inc. (OTCQB: SGMD) are essential to the cannabis industry.
While cannabis can be grown outdoors, almost everything about the current industry drives producers away from this method. Indoor facilities are more secure, an important factor when producing a high-value, high-demand crop prized by criminals. Indoor cultivation also provides far greater control over the conditions in which the cannabis grows, as well as over the quality of the plants grown. Lighting, water, nutrients and temperature all affect the final outcome of the plants, including the quantity of active ingredients in them. High-quality hydroponic equipment, like that supplied by Sugarmade, gives growers control over the forces affecting their cannabis crop.
This control is becoming increasingly important as the cannabis market grows. Customers may be more forgiving of varying quality when companies are small or their product is hard to obtain. But as companies grow and supplies become more consistent, people expect consistency and quality — things that are harder to provide without hydroponics.
The growing number of companies in the sector also means that competition for customers is growing. Companies are racing to create crops with higher dosages of tetrahydrocannabinol (THC) and cannabidiol (CBD), the most significant active ingredients in cannabis. The more powerful the plant, the more customers will return, creating a strong brand loyalty. Again, hydroponics can be an essential piece of this success.
Demand for hydroponics has led to swift growth for Sugarmade, which expects 500 percent growth in revenue for the fiscal year ending in 2019. One of the ways in which Sugarmade is meeting growing demand and achieving these impressive results is through acquisitions.
Mergers and acquisitions are an obvious route to growth for companies in a maturing sector, and in the past year, that’s what many cannabis companies have chosen to do. The first half of 2018 saw 145 mergers and acquisitions in the sector, compared with 79 for the same period the previous year. Some of the pioneers who created cannabis startups in the early days of the industry are cashing out, making way for a field of larger, established companies.
Now caught up in the wider patterns of the cannabis market, hydroponics is heading down the same path. With its latest acquisition of Sky Unlimited LLC, Sugarmade has been one of the leaders in this trend. The cash and shares deal, worth $40 million, will give Sugarmade control of AthenaUnited.com, an online outlet providing a range of hydroponic equipment.
"This acquisition will further boost our already very rapid growth rate and is expected to be high accretive to common shareholder value," said Sugarmade CEO Jimmy Chan. "Sky Unlimited and Athena are complementary to our existing business operations, allowing us to not only increase our emphasis on brands but also to diversify our revenue streams to now include the larger commercial cultivation operations."
Cannabis Goes to Vegas
Sugarmade was on the hunt for more acquisitions as its team headed to Las Vegas for MJBizCon.
One of the cannabis industry’s largest trade shows, MJBizCon took place November 14–16 at the Las Vegas Convention Center. Investors, entrepreneurs and professionals from across the sector headed to Vegas for three days of talks, meetings and the sort of networking that dominates any trade show.
This year’s show had a record number of attendees and exhibitors, reflecting the huge growth that the industry has seen. Some 25,000 attendees met up and discussed topics such as the latest industry trends and how to navigate the difficult waters of regulatory compliance.
One prominent item on the agenda was the move by bigger players into the cannabis market. Beverage and tobacco companies are eyeing cannabis as an alternative revenue stream, with some striking early partnerships with cannabis businesses. To survive in the face of these big money competitors, businesses will have to grow — one of the motivations behind Sugarmade’s acquisition strategy. There’s still space for small fish in the cannabis pond right now, but that space is shrinking.
MJBizCon provides fertile territory to lay the groundwork for acquisitions. There, companies can make contacts, seek investments and demonstrate their value. It’s a perfect venue to attract acquisition targets and start negotiations.
So it was a full-press court for Sugarmade at the event, as the company set out to continue its successful growth strategy. Though this year’s moves have already given it a competitive edge, Sugarmade is always looking to strengthen its foothold and further establish its position as an industry presence.
"Over the past year, we have significantly enhanced our operational staff and our internal systems preparing for our rapid growth,” Chan said in a recent statement. “With these changes, we believe we are optimally sized, but we want to ensure we are able to manage our aggressively planned growth rate.”
Big Moves for Big Profits
Other companies are also making bold moves to profit from the growth of the cannabis sector.
While expansion is critical to surviving in this fast-changing environment, mergers and acquisitions aren’t the only answer. Tilray, Inc. (NASDAQ: TLRY) is instead focusing on its well-developed research and design program to place it ahead of competitors. A leading medical marijuana company, Tilray has established a prominent position in the North American healthcare market. But it’s also looking beyond the United States and Canada as the cannabis industry goes increasingly global. With customers on five continents, Tilray has become an international cannabis business, and one still set on expansion. The company is using its public offerings in the United States and Canada to gain additional finance that will fund ongoing growth.
Canopy Growth Corp. (NYSE: CGC) (TSX: WEED), one of the biggest cannabis companies in Canada, is financing its expansion through a connection outside the industry. The company struck a deal with Constellation Brands, the major U.S. beverage company behind brands such as Corona. The deal has seen Constellation acquire more than a third of the shares in Canopy Growth in return for $4 billion in investment. It’s the biggest move so far by outside businesses into the cannabis sector and likely an omen of things to come. Many are predicting that this will lead to Canopy Growth’s eventual absorption under the Constellation umbrella, once cannabis becomes a big enough market to deserve more of the beverage giant’s attention.
Growth in the industry has been good for Cronos Group, Inc. (NASDAQ: CRON) (TSX: CRON), whose revenues were up 186 percent in its third-quarter reporting this year. Increased cultivation, a partnership with Ginkgo Bioworks on cultured cannabinoids and a move into Latin America are all part of the company’s announced plans to continue its expansion. By following a diverse range of growth tactics, Cronos is solidifying its position as a significant international player.
Collaboration with other companies is also part of the strategy for Aphria (NYSE: APHA) (TSX: APHA). The company has formed a joint venture with Perennial, Inc., to develop products for the Canadian cannabis market, currently one of the most significant cannabis markets in the world. Such collaborations are allowing companies to achieve more together than they could alone and perhaps survive in the face of larger competitors.
With the cannabis industry growing at a dramatic rate, both cultivators and the companies that supply them will have to find ways to increase their impact if they want to beat the competition.
For more information on Sugarmade, visit Sugarmade, Inc. (OTCQB: SGMD)
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