Acquisitions Reveal the Steadily Changing Shape of the Cannabis Sector

June 19, 2019 08:00:02

CannabisNewsWire Editorial Coverage: The cannabis sector continues its steady shift toward big business, big money and a focus on the value add of immaterial assets.

TransCanna Holdings Inc. (CSE: TCAN) (FRA: TH8) (TCAN Profile) has made several key acquisitions, creating a large operation with various licenses and recognized brands. HEXO Corp. (TSX: HEXO) (NYSE American: HEXO) has taken a similar path with the acquisition of Newstrike. Canopy Growth Corporation (TSX: WEED) (NYSE: CGC) is building a positive public profile through releasing educational tools. Aphria Inc. (TSX: APHA) (NYSE: APHA) has expanded the hunt for cultivation licenses to Germany. Meanwhile, companies such as Charlotte’s Web Holdings Inc. (TSX: CWEB) (OTCQX: CWBHF) keep releasing new products into the market.

  • Cannabis companies are increasingly engaging in multimillion-dollar acquisitions.
  • These support a consolidation of the industry as it moves from scattered creativity to efficient large businesses.
  • The trend built in part on intangible assets, including brands and licenses.

To view an infographic of this editorial, click here.

A Very Different Business

The image of the cannabis industry varies hugely depending upon one’s point of view. To proponents, the market is a radical and transformative sector that’s bringing the world together. For opponents, it is one more vice threatening public morals. For many in the middle ground, it’s a space where hippies and stoners can thrive, though not one that encourages the buzz and dynamism of mainstream business.

In reality, the cannabis sector fits none of these images. The industry is emerging from its early, tentative steps into legality to become a significant business sector much like any other, with all the apparatus of modern capitalism and a focus on intangible assets such as intellectual property. All of this is reflected in the sector’s recent burst of mergers and acquisitions.

Big Money Deals

The most eye-catching aspect of mergers and acquisitions in the cannabis sector is the amount of money that goes into them. Take just two recent examples from a single company, TransCanna Holdings Inc. (CSE: TCAN) (FRA: TH8). In the past few months, the Vancouver-based cannabis company has made announcements on two major deals. First came the acquisition of a 196,000-square-foot vertically integrated cannabis facility for a total purchase price of $15 million. Then came a letter of intent relating to Californian company Lyfted Farms outlining TransCanna’s plans to acquire Lyfted’s business and assets for $5.5 million.

By the standards of some businesses, these might not seem like huge deals. But when a company is investing $20 million on expansion in the space of a couple of months, that certainly says something. That TransCanna can make these deals is a show not only of the strength of the company but also the strength of the industry.

The idea that there’s a lot of money in cannabis might not be surprising to anyone who’s seen TV depictions of the drug trade. Dramas such as Narcos show a world of high earners with big stacks of cash. But as sociologists such as Sudhir Venkatesh have shown, the reality for most people working in the illegal drug trade is vastly different. They earn less than minimum wage in jobs that are dangerous and uncertain.

The financial growth of the legal cannabis industry has therefore been a positive move for everyone from company leaders to their lowest-paid employees. The legalized trade is pulling money out of the black-market economy and allowing those at the top to earn big bucks while also providing employees with a decent wage. Far from weakening the power of legal providers, paying employees properly is leaving them with enough money to go around buying up competitors, as TransCanna is doing.

Success has also brought funds from outside. From private individuals to big alcohol and tobacco companies, investors are pouring money into pot, allowing businesses to expand while keeping their employees happy. There are living wages at the bottom and big money at the top.

Tidying Up the Market

The growth of the legal cannabis industry started with a scattershot approach. TransCanna is just one of many companies that have grown into the market from relatively small beginnings. Some began with entrepreneurs seeing a new industry within which to operate. Others were experienced cannabis cultivators moving from the illegal to the legal market. Still others were pharmaceutical companies dipping their toes into a new medicine and, from there, into the recreational industry.

As a result, the cannabis industry is cluttered with diverse and disconnected businesses. But now it’s moving on from this scatter-gun approach to a period of consolidation.

This doesn’t mean that the variety created in that early surge is being lost. When larger companies buy up smaller ones, it’s often with the aim of continuing the individual brands and styles the smaller companies have created. For example, TransCanna has announced the acquisition of GoodFellas, which will allow it to take control of the Daily Cannabis Goods brand. TransCanna CEO Jim Pakulis has talked not in terms of absorbing the Daily brand into TransCanna’s existing identity but in terms of maintaining Daily and expanding its sales.

The consolidation of multiple brands and businesses into a smaller number reflects a dialectic process that’s common in new business areas. First comes a burst of creativity. With few precedents and no big players dominating the market, entrepreneurs and creatives have free rein. Some of their experiments fail, but the ones that succeed get consumers interested and fill the market with ideas.

While this creates plenty of exciting idea and products, it’s also inefficient. In the phase that follows, bigger companies step in or emerge from among the smaller ones. Consolidation creates efficiency, providing more reliable products for consumers and better value for companies.

The contrasting approaches of small innovative companies and larger efficient ones together create excellent value. That’s the point the cannabis industry is now approaching and that TranCanna’s acquisitions are a part of.

The Power of the Immaterial

In the illegal market, all that mattered for cannabis sellers was the product. But in the legal market, things work differently. When a company can use the full apparatus of marketing, intangible assets such as intellectual property become important. That’s why GoodFellas is valuable to a company such as TransCanna — not just for its cannabis but for the Daily brand that’s attached to it.

And while intangible assets are normally talked about in terms of brand and IP, there’s another sort of asset that gets much less publicity and that the cannabis industry is bringing to investors’ attention: legal licenses.

Licenses of various sorts are important for a wide range of industries, from food production to mining. But they have a particular prominence in the cannabis industry because tight regulation has created a scarcity of licenses. When TransCanna subsidiary TCM Distribution Inc. gained cannabis manufacturing and distribution permits from the City of Adelanto, California, it was an important step in the company’s growth within the state. And when a deal like TransCanna’s acquisition of Lyfted is announced, the target’s cannabis licenses are often mentioned. These licenses are a crucial asset and one that investors are concerned about. Without the licenses, the business can’t function.

The prominence of licenses is a new feature of investment for those going into cannabis. But it could be a feature that helps investors recognize these assets in other companies. Cannabis companies are increasingly about immaterial assets, and immaterial assets are increasingly about licenses as well as IP.

Keeping Profiles High

In such an atmosphere, cannabis companies are working hard on keeping their profiles high while building up their portfolios of products.

Canadian cannabis company HEXO Corp. (TSX: HEXO) (NYSE American: HEXO) has, like TransCanna, been using acquisitions to build up its business. Originally a medical cannabis provider, HEXO joined the recreational market when Canada changed its laws last year. Since then, it has completed an acquisition of Newstrike, the parent company of Up Cannabis Inc, a licensed producer and distributor. It’s a deal that fits with the importance of immaterial assets. Licensing is important in Canada, both for production and distribution, and acquiring a company that is already licensed is the easiest way to expand a company’s footprint in the country.

Good publicity is another of the intangible assets that come with a good company, and few have achieved more publicity within the sector than Canopy Growth Corporation (TSX: WEED) (NYSE: CGC). When the company received a multibillion-dollar investment from Constellation Brands, it was the first time the sector had received such a big input of cash from outside, so the move drew substantial attention. Now the company is raising its profile in a different way, demonstrating its responsible attitude through the release of digital cannabis education tools.

Aphria Inc. (TSX: APHA) (NYSE: APHA) has taken the hunt for intangible assets global, with the acquisition of five cultivation licenses in Germany. With the North American cannabis industry increasingly well established, Europe is the next big frontier, and Aphria is racing in ahead of many of its competitors.

All this work on intangibles would be useless without physical products to go with it, and product innovation continues at a high pace. Charlotte’s Web Holdings Inc. (TSX: CWEB) (OTCQX: CWBHF) has recently announced the release of hemp-extract CBD gummies designed help with calm and sleep. CBD products are an increasingly important subsector of the market, and products of this kind have potentially wide reach.

The cannabis industry is changing, with big money, consolidation and growing intangible assets, but it remains grounded in a strong consumer desire for cannabis.

For more information on TransCanna Holdings, visit TransCanna Holdings Inc. (CSE: TCAN) (FRA: TH8)

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