As pro-cannabis legislation advances in the United States (US), we have noticed increasing interest in the companies that are capitalizing on it.
One of the biggest potential catalysts for the cannabis sector would be the passing of the SAFE Banking Act and we are favorable on how the industry is becoming more accepted by key members of the government.
According to Pew Research, 91% of US adults believe that cannabis should be legal for medical use. The poll also found that 60% of adults believe that cannabis should be legal for recreational use and we find the support to be overwhelming. Pew Research stated that the number of adults that support legal cannabis has more than doubled since 2000 and we expect the new White House administration to play an important role in the advancement of the industry.
During the last year, several states voted to legalize some form of legal cannabis (medical or recreational) and this is a trend that we are bullish on. Companies that are levered to these markets are expected to benefit from the change in legislation and we have been closely following this.
So far this year, we have noticed a change as it relates to Canadian cannabis companies and the US market. Several leading Canadian operators have made investments and acquisitions of strategic assets in order to be positioned to capitalize on the US market (once legislation permits).
Earlier this week, The Valens Company Inc. (TSX: VLNS) (OTCQX: VLNCF) jumped on the US cannabis bandwagon through the acquisition of Green Roads, a leading US cannabidiol (CBD) brand. The acquisition is expected to strengthen Valens’ capabilities to supply US domestic and global markets with an expanded product offering. The leading CBD health and wellness brand has an established manufacturing and distribution platform and is expected to be immediately accretive to Valens.
On a pro forma basis, the combination of Valens and Green Roads creates a business that would have generated C$111.6 million of total revenue in 2020 (based on Green Roads’ unaudited financials for 2020) and we find this to be of significance.
According to Brightfield Group, the US CBD market is currently estimated at nearly C$6 billion and is the largest cannabinoid market in the world. The acquisition of Green Roads is expected to provide Valens with access to this burgeoning market and we will monitor how the combined company can capitalize on it.
Green Roads produces health and wellness products using hemp-derived CBD and provides manufacturing services to a number of partners. The hemp-based CBD brand has an extensive distribution network that consists of more than 7,000 retail stores and a robust e-commerce and marketing platform.
Going forward, we expect Green Roads to play a key role in how Valens is able to capitalize on the US market. We believe that Valens acquired the brand for a fair valuation and are favorable on how the deal is structured. Over the next year we expect to see more Canadian cannabis companies enter the US market and want to highlight 4 Canadian Licensed Producers (LPs) that already have leverage to the US.
Canopy Growth Corporation (WEED.TO) (CGC) is one of the most well-known cannabis companies and we attribute the awareness to its relationship with Constellation Brands (STZ), which invested more than $4 billion in the cannabis business. Through this relationship, Canopy Growth has been capitalizing on the cannabis beverage market in Canada and the US (only sells hemp-based CBD beverages in the US).
A few years ago, Canopy Growth announced a strategic investment and agreement with Acreage Holdings, a leading multi-state operator in the US. Through this relationship, Canopy Growth has attractive leverage to the US cannabis retail market. Acreage Holdings is focused on several strategic US markets and we expect a change in federal legislation to serve as a major catalyst for Canopy Growth.
Aphria and Tilray
Aphria, Inc. (APHA.TO) (APHA) and Tilray, Inc. (TLRY) have been grabbing headlines after the companies announced a merger agreement in late 2020. The Canadian LPs own strategic assets in the European Union (EU) and in the US. We expect the combined company (when the merger is approved) to compete with Canopy Growth for the title of the largest cannabis company in the world and will monitor how the story advances from here.
Prior to the merger being announced, Aphria acquired SweetWater Brewing Company and we believe the asset provides the business with strategic infrastructure in the US. When cannabis is legalized or decriminalized in the US, we expect SweetWater to start producing cannabis-infused beverages (both CBD and THC) and are favorable on the growth prospects that are associated with this opportunity.
Through the ownership of Manitoba Harvest, Tilray has leverage to the US hemp-based CBD market. We are favorable on the US assets that will be owned by the combined company (if the merger is approved) and expect this aspect of the business to serve as a crucial long-term growth driver.
Last year, Aurora Cannabis Inc. (ACB.TO) (ACB) started to execute on a growth strategy that is similar to Valens and acquired Reliva, which is considered to be a leading US CBD brand (according to Neilson).
The acquisition represented a major shift for Aurora Cannabis which previously invested in and acquired Canadian and international cannabis producers. We attribute the change in strategy to the change in the management team and continued to have a mixed opinion on how the business has evolved.
During the last year, Aurora Cannabis has been under heavy pressure and has been forced to write off previously acquired assets. We believe the market does not have the same level of faith in Aurora Cannabis’ new management team and will monitor how the story evolves from here.
Cronos Group Inc. (CRON.TO) (CRON) is one of the few Canadian LPs to receive an investment from a big tobacco company and is an operator that we are closely following. In 2018, Altria Inc. (MO) invested $1.8 billion into the cannabis company and we have been keeping an eye on how it has put the capital to work.
In 2019, Cronos acquired Lord Jones which sells a variety of CBD-infused products. The brand provides Cronos with leverage to the US and we expect it to play an important role in how the business capitalizes on this market. Last year, Lord Jones generated approx. $9.5 million of revenue which represents approx. 20% of consolidated net revenue.
In future years, Cronos expects to generate more revenue from the sale of CBD products. The Canadian cannabis company has formed a partnership with actress Kristen Bell to launch a series of CBD products which will be available at more than 550 Ulta Beauty (ULTA) locations. We are favorable on this relationship and will monitor how it supports revenue growth on a year-over-year basis.
To learn more about the Canadian LPs that are positioned to capitalize on the US cannabis market, please send an email to firstname.lastname@example.org with the subject “Canadian LPs with US Exposure” to be added to our distribution.
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