When it comes to the consolidation trend in the cannabis industry, United States (US) hemp cannabidiol (CBD) operators have been an acquisition target for Canadian Licensed Producers (LPs) and concentrate businesses.
3 Reasons to be Excited About US CBD Operators Being Acquired
2021 has been a banner year for the US cannabis market and leading Canadian cannabis operators have been acquiring assets to have leverage to it. We believe this is a sound expansion strategy for the following reasons:
- Leading US CBD operators are generating a significant amount of cash flow
- The US CBD assets provide acquirers with attractive leverage to the US market
- The valuation that is associated with these acquisitions is much more attractive than prior years
Timing is everything is a commonly used phrase that we believe rings true for the consolidation trend with US CBD brands and operators.
In 2019, the US CBD market peaked and leading US CBD operator Charlotte’s Web Holdings, Inc. (TSX: CWEB) (OTC: CWBHF) was valued at more than $2 billion (based on market capitalization in August 2019). Around this time, several leading private US CBD operators were valued between $250 million to $500 million, and many analysts expected to see these operators acquired for major premiums.
Today, we want to highlight three Canadian cannabis companies that acquired US CBD companies to gain leverage to the burgeoning cannabis market. We believe that two of these companies were patient and showed discipline with their respective acquisition strategy and that one of the companies acquired a mid-tier (at best) US CBD asset.
Village Farms: Patience Pays Off
We believe the biggest winner of the US CBD acquisition trend was Village Farms International Inc. (TSX: VFF) (Nasdaq: VFF) which acquired Colorado-based Balanced Health Botanicals for $75 million in August. The transaction provides the Canadian LP with an avenue to immediately enter the US CBD market as well as the broader consumer packaged goods (CPG) market and Village Farms expects the deal to immediately boost net income.
According to the terms of the agreement, Village Farms will pay Balanced Health deal $30 million cash and 4.7 million shares (equal to $45 million at the time the acquisition was announced). The Canadian LP expects the transaction to allow them to capitalize on the US cannabis market when regulation permits.
Balanced Health develops and sells high-quality, CBD-based health and wellness products. The CBD brand owns a diverse portfolio of CBD and other cannabinoid products that are distributed via e-commerce and brick and mortar retail channels. Its e-commerce platform, CBDistillery™ is a top-five US CBD brand (according to Brightfield Group: 2021 Mid-Year US CBD Report) and we are bullish on the growth prospects that are associated with the brand.
A few years ago, we believe that Balanced Health Botanicals could have been acquired for almost $500 million. The way we determined the CBD brand’s potential transaction value is primarily based on how the market was valuing Charlotte’s Web (based on market capitalization).
We believe that Village Farm’s management team waited for the right time to acquire a premium US CBD brand and expect the transaction to prove to be immediately accretive. Going forward, we will monitor how Village Farms is able to use Balanced Health as a trojan horse style strategy to enter the US market and this is an opportunity our readers should be aware of.
Valens: Enters US Market via Acquisition
Earlier this year, The Valens Company Inc. (TSX: VLNS) (OTCQX: VLNCF) completed the acquisition of Green Roads and its manufacturing subsidiary for US$40 million. According to the transaction, the US CBD brand could receive an additional US$20 million if it meets certain EBITDA milestones by 2022.
Like Village Farms, we believe that Valens has taken a patient strategy for growth and expect the acquisition to immediately prove to be accretive. We expect Green Roads to provide Valens with several strategic benefits like direct access to the US market with a leading CBD health and wellness brand that has an established manufacturing and distribution platform with exposure to the global opportunity (Green Roads and Valens-manufactured products are being sold in more than 10 countries).
With these added capabilities, Valens expects to improve its ability to engage and build cross-border partnerships with CPG companies. We will monitor how the management team is able to enter new markets through Green Roads and expect this to play an important role in the success of the operation.
By acquiring Green Roads, we believe that Valens strengthened its position in the Canadian market by expanding its product portfolio through the introduction of various CBD products from Green Roads’ award-winning product line.
As part of the transaction, Valens expects to invest in Green Roads to capitalize on the anticipated growth of the US CBD market. The investment is expected to further the development of its e-commerce platform, support the expansion of its retail distribution network, and increase the brand’s sales and marketing resources.
A few years ago, a few broker-dealers were assigning Green Roads a valuation that was incrementally higher. We believe the saturation of the CBD industry negatively impacted the valuations associated with US CBD operators and expect Valens to benefit from this.
Aurora Cannabis: Can it Do Anything Right?
Last year, Aurora Cannabis Inc. (TSX: ACB) (Nasdaq: ACB) announced plans to enter the US CBD market through the acquisition of Reliva, LLC. This was a transaction that caught us by surprise, and we were unaware of Reliva at the time of the announcement.
We believe that we have our finger on the pulse of the cannabis industry and were surprised that we were unaware of a CBD brand that claimed to be the largest brand in the us (according to Nielsen). Although Nielsen is a well-respected organization, the firm is relatively new to the cannabis industry, and we believe that its data on the sector is not of the best quality.
Aurora acquired Reliva for approximately US$40 million of common shares and the transaction includes a potential earn-out of up to US$45 million payable in shares or cash (Aurora’s can decide the type of compensation). The potential earn-out is contingent upon Reliva achieving certain financial targets over the next two years and we will monitor how the story advances from here.
According to the management team, the combination of Aurora and Reliva is expected to create a market leading international cannabinoid platform. The transaction is forecasted to increase Aurora’s operating scale, international reach, and product and brand diversity while it remains focused on generating positive Adjusted EBITDA.
A few months after the acquisition was completed, executives from Reliva took over key leadership roles at Aurora. Several high-profile executives that were with Aurora Cannabis from inception were ousted from the business and the market did not respond favorably to the changes. Following these management changes, the market is highly focused on how the new team will be able to turn the story around. Going forward, the name of the game for Aurora is execution and we are cautiously optimistic with the global cannabis business due to declining cash flows and liquidity concerns.
If you are interested in learning more about Canadian companies that are entering the US market via the acquisition of CBD operators, please send an email to firstname.lastname@example.org with the subject “Canadian Companies Acquiring US CBD Assets” to be added to our distribution list.
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