During the last year, we have seen an increase in the amount of merger and acquisition (M&A) activity in the US cannabis market and this is a trend that we expect to become more significant in 2021.
As we near the end of 2020, we expect to see a spike in M&A activity and want to highlight 5 of the recent transactions in the sector. We believe that these transactions provide great information as it relates to the types of assets that are being acquired and will monitor how the trend continues to play out.
Halo Labs: Has a First Mover Advantage on the UK
Halo Labs Inc. (NEO: HALO) (AGEEF) has been very busy on the M&A front and is an opportunity that we continue to closely follow. Earlier this month, Halo reported to have completed the acquisition of a UK based cannabis distributor, Canmart Ltd.
Through the acquisition, Halo Labs became one of the few distribution platforms for cannabis-based products for medical use (CBPMs) in the UK. Halo Labs is one of the few US cannabis companies that is focused on the international cannabis opportunity and we are favorable on the leverage that it has the European Union (EU) through the acquisition.
In late 2018, Canmart started to focus on the medical cannabis opportunity in the UK and is considered to be an early mover on the industry. Canmart has been executing on a multi-faceted growth strategy and has been granted all the necessary licenses for bulk importation, as well as the storage and distribution of CBPMs.
According to Halo Labs, Canmart has the necessary logistics expertise, storage facilities, pharmaceutical and healthcare relationships in order to satisfy the increasing demand for medical cannabis products in the UK. We believe the acquisition can quickly prove to be accretive and will monitor how it supports the growth of the business.
Driven and Stem: A Complicated Asset Combination
A few weeks ago, Stem Holdings Inc. (STEM.CN) (STMH) and Driven Deliveries Inc. (DRVD) announced that the business would merge and this is a transaction that caught our attention. Stem Holdings is a US multi-state operator (MSO) and Driven Deliveries is a cannabis delivery platform that is focused on the opportunity in California.
Stem Holdings owns six dispensaries that serve medical and recreational markets. The company owns 1.8 million square feet of real estate and is licensed to cultivate on 260,000 square feet of hemp and cannabis. Stem Holdings owns a portfolio of cannabis and hemp brands and we expect to see immediate synergies with Driven’s platform.
The combined company is expected to be the first cannabis cultivator and omni-channel retailer. We are curious to see how the management teams can come together and execute on the integration of the assets. We do not expect the process to be as seamless as expected and will monitor how the story advances from here.
The cost that will be associated with combining the two businesses will not be cheap and we will monitor how this impacts the integration process. Due to the number of states that Stem Holdings is levered to, the management team will have to navigate unique regulatory environments per state (and sometimes by city or county) and we expect to see the combined company take a slow and steady approach.
If successful, the combination of the two businesses will form a vertical integrated cannabis company that has leverage to high-growth verticals on the cannabis value chain. The combined company will be levered to cultivation (cannabis and hemp), manufacturing (processing, extraction, and manufacturing of edibles and topical consumables), distribution (dedicated distribution facilities and retail stores as delivery hubs), and retail (brick and mortar, e-commerce, delivery).
Over the next few quarters, we expect to learn a lot about the integration process and will monitor how the combined company is able to expand. Going forward, the name of the game for the combined company is execution and this is an opportunity to be aware of.
Innovative Industrial Properties: An Acquisition Story in the Making
Innovative Industrial Properties, Inc. (IIPR) is the world’s largest cannabis focused real estate investment trust (REIT) and is an opportunity that we have been following since it listed on the New York Stock Exchange (NYSE) in 2016.
During the last year, Innovative Industrial Properties has ramped up the pace of acquisitions and has been easily able to raise capital as needed. As of November 16th, the company reported to own 64 properties that total approximately 5.2 million rentable square feet (including approximately 1.9 million rentable square feet under development/redevelopment), which were 99.3% leased (based on square footage) with a weighted-average remaining lease term of approximately 16.3 years.
From a geographic standpoint, the company has a diverse portfolio of properties that are located in Arizona, California, Colorado, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, and Virginia.
Another important aspect of the story is related to the level of quality that is associated with the companies that Innovative Industrial Properties does deals with. The cannabis REIT has formed relationships with several leading US cannabis producers and we believe that this bodes well for the future of the business.
So far, Innovative Industrial Properties has invested almost $1 billion (excluding transaction costs) to acquire the properties and has committed to an additional $293.1 million to reimburse certain tenants and sellers for completion of construction and tenant improvements. While these numbers are large, the company has benefited from its access to the capital markets and we find this to be of significance.
Earlier this week, Innovative Industrial Properties announced that it is extending its long-term real estate relationship with Kings Garden, which is one of California’s top cannabis producers, by acquiring a Southern California property. The purchase price for the property was more than $25 million and consists of approximately 192,000 square feet of industrial space. Before the end of the year, we expect the NYSE traded cannabis REIT to announce additional acquisitions and is an opportunity that we are closely following.
Aurora Cannabis: In the Middle of a Major Transition
Aurora Cannabis Inc. (ACB.TO) (ACB) is a Canadian cannabis producer that recently entered the US market through the acquisition of Reliva, a US CBD brand. When the acquisition was announced, we became a little concerned with the direction the business is going. Since then, there have been major changes to the management team which have not raised our level of confidence in the operation and we will monitor how the story advances from here.
Earlier this week, Aurora Cannabis reported to have completed an oversubscribed private placement that included the entire overallotment option. The company raise more than $175 million of gross proceeds and we will monitor how the management team is able to use the capital to resurrect the business.
Going forward, we are interested in seeing how the business changes and will be highly focused on how the management team approaches the international opportunity. We believe the European Union (EU) is one of the most important international markets to have leverage to and will monitor how Aurora Cannabis executes on this aspect of the story.
During the last quarter, several leading broker-dealers that cover the cannabis industry have gone negative on Aurora Cannabis and have been lowering price targets on the stock. A few of the brokers downgraded the company to sell and this is a trend that we are following, We believe that the company is betting big on the US CBD market and hope that they know what their doing.
Canopy Growth: Positioned to Capitalize on the US Market
When it comes to Canadian cannabis producers that are planning on capitalizing on the US market, we are most excited about Canopy Growth Corporation (WEED.TO) (CGC). With almost $2 billion of cash on the balance sheet, the company has staying power and has the ability to grow the business through a variety of tactics.
One of the key aspects of the Canopy Growth story is related to Acreage Holdings, a leading US cannabis retailer. Through a strategic investment in Acreage Holdings, Canopy Growth is positioned to capitalize on the US market once cannabis is no longer illegal at the federal level.
Following the 2020 general election, cannabis decriminalization in the US seems to inevitable and we are favorable on the potential for Canopy Growth. Last month, the companies reported to have amended the investment agreement and Canopy Growth will need to make an up-front payment of more than $37.5 million to Acreage shareholders. Under the original agreement, Canopy was supposed to pay more than $300 million to Acreage shareholders and we find the change to be substantial.
Over the next year, we expect to see Canopy Growth take additional steps to position itself to capitalize on the US cannabis market. The new management team is comprised of executives that have a proven track record of success in a variety of industries and we will monitor how they are able to drive the story forward.