Hunt for Perfect Acquisitions Reshapes Cannabis Industry

HempWire 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.

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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