CannabisNewsWire
Editorial Coverage: The ongoing growth of the cannabis sector
is now driving a surge in acquisitions, as companies compete to
control a burgeoning market.
- The cannabis sector has seen incredible growth, reaching $10
billion this year in the United States alone.
- This has led to a wave of mergers and acquisitions, as
companies strengthen their positions.
- This pattern is accompanied by expansion into new markets and
investment in smaller companies by their larger cousins.
Hydroponic supplier Sugarmade, Inc. (OTCQB: SGMD)
(SGMD
Profile) is in the process of acquiring two hydroponic
companies, improving its already strong position as a provider of
vital cultivation equipment. Industry leader Aphria, Inc.
(OTCQB: APHQF) is making acquisitions in Jamaica, Latin
America, and Canada, with the latter giving it access to European
markets. Cannabis outsider Constellation Brands, Inc.
(NYSE: STZ) has invested heavily in cannabis grower Canopy
Growth, with an eye to creating cannabis-infused beverages. In
Florida, MedMen Enterprises, Inc. (OTCQB: MMNFF)
has acquired cultivation and retail assets, expanding its reach
from three to four states. And Emerald Health Therapeutics
(OTCQX: EMHTF) is set to acquire the remaining shares of
Northern Vine Canada Inc., in a move that gives Emerald full
ownership of Northern Vine.
To view an infographic of this editorial, click here.
Acquisitions Heating Up in the Cannabis
Sector
For a new sector of the economy, the cannabis industry has grown
at a fantastic rate. In the relatively few years since medical
cannabis started to be legalized in North America, a
multimillion-dollar industry has evolved, covering cultivators,
retailers, marketing and all the support services the industry
needs. The recent legalization of recreational cannabis in several
U.S. states and Canada, together with the growing popularity of
medical cannabis, is propelling the industry’s value into the
billions.
Initially, growth was mostly driven by the creation of new
companies or subsidiaries of pharmaceutical firms, as they set up
new businesses in a new economic space. But in recent years, that
has changed. Larger cannabis companies have started taking over
smaller rivals and companies serving different parts of the market.
Acquisitions are on the rise.
Consolidation in a Growing Sector
The cannabis sector is made up of a wide range of companies,
from those focused on cultivation to the likes of Sugarmade, Inc.
(OTCQB: SGMD), a hydroponics supply company that is
making a move into the broader cannabis space.
The appearance of this range of companies has been made possible
by the phenomenal growth of the market. The cannabis market in the
United States is expected to be worth over $10 billion
this year, 50 percent larger than it was in 2016, and that
growth shows no sign of slowing. With an estimated $46
billion worth of business still existing outside legal markets,
there’s vast scope for expansion as legalization spreads and
consumers are drawn away from black market dealers. And that’s only
in the United States, never mind the rest of the world.
As faith in the industry grows, investors are pouring in
additional funding, leading to a boom in mergers and acquisitions.
Some early players are cashing out, making the most of their
companies’ growth to make a healthy profit and move on to something
new. Others are taking over these smaller businesses, creating
businesses with greater economic clout and more vertical
integration.
This led to 145 mergers and
acquisitions in the sector in the first half of 2018, compared
with only 79 during the same period a year before. Some of these
have made big news, with Aphria investing
$200 million acquisitions in Latin America and Jamaica while
drinks company Constellation Brands
acquired a third of the equity in Canopy Growth. This shift
creates even more opportunities for companies sticking in the
sector, such as Sugarmade.
Acquisitions Big and Small
Based in California, Sugarmade has immediate access to one of
the world’s largest legal cannabis markets and is making the most
of that. One of the largest publicly traded hydroponic supply
companies, its growth has been fueled by the vital role hydroponic
equipment plays in the cultivation of cannabis.
Much cannabis cultivation takes place indoors, using
sophisticated specialist equipment produced by companies such as
Sugarmade. This gives producers greater control over growing
conditions, encourages more successful crops, allows year-round
production and makes it easier to secure this valuable crop.
Already a significant supplier of hydroponics, Sugarmade looks
set to consolidate its position through the recently announced
acquisition of two companies selling hydroponic and
other cultivation supplies. This could make a huge difference
to the company’s financial fortunes. Its projected revenues for
2019, previously set at $30 million, could exceed $75 million if
these deals go through, more than doubling the company’s
revenues.
“The hydroponic supply sector is still highly fragmented with
many of the larger players not likely to reach public company
liquidity events for the original entrepreneurial teams,” said
Jimmy Chan, CEO of Sugarmade. “We have entered into talks with at
least two of these companies for acquisition, which we believe will
be highly accretive for common Sugarmade shareholders and additive
to our already robust top line growth rate. We wanted to publicly
disclose these discussions to ensure that all shareholders have
equal access to our direction, thus our recent public filing.”
The company has set a special shareholder meeting October 10,
creating an opportunity to establish more shares in the company and
discuss the acquisitions. In a fast-growing sector such as
cannabis, there’s little time for delay.
Investing in Others
Sugarmade’s success is largely driven by reaching new markets
and supporting other companies, maximizing its potential for
growth. Though U.S. based, the company has also begun expansion
into the European market through online sales into
the United Kingdom. Even in countries without a legal cannabis
market, it is possible for hydroponics companies to sell their
wares to people growing other specialist plants. And with cannabis
legalization spreading globally, this allows companies such as
Sugarmade to firmly establish their positions before a new market
emerges.
The company is expanding its presence within the North American
cannabis market by investing in industrial hemp and cannabidiol
(CBD). Industrial hemp, a form of cannabis without the high, can be
used for a wide range of purposes and looks set to be widely grown
in the United States following the passage of the 2018 Farm
Bill.
CBD, which can be derived from industrial hemp, is a chemical
whose beneficial properties are only just starting to be understood
and which is used in a growing range of health and wellness
products. Sugarmade is investing $1 million
Hempistry, Inc., a Nevada hemp company. This is expected to
provide access to Hempistry shares as well as a supply agreement
between the two companies.
Other businesses are also working to expand within the
sector.
Aphria, Inc. (OTCQB: APHQF), one of the most
successful companies in the cannabis sector, is undertaking
acquisitions that will extend its reach beyond North America. In
July, it announced
acquisitions in Argentina, Colombia, and Jamaica worth around
$200 million. Acquired through sister company Scythian Biosciences
Corp., these will give Aphria reach into markets outside the United
States and Canada. The company also expanded its international
reach through the acquisition of
Canadian company Nuuvera, which has supply and sales agreements
with companies in Germany, Italy, Spain, Malta, the United Kingdom,
Israel and Uruguay.
Drinks manufacturer Constellation Brands, Inc. (NYSE:
STZ) is best known for beverages such as Corona, but it
has recently made some surprising choices. The company has invested heavily in Canadian company Canopy Growth,
moving into the cannabis market. Constellation’s approach isn’t
about selling cannabis but about creating cannabis-infused drinks.
These beverages are due to become legal in Canada next year. By
creating a bridge between beverage manufacturers and cannabis
growers, Constellation could be the first to establish widely
recognized cannabis drink brands.
Cannabis manufacturer and retailer MedMen Enterprises,
Inc. (OTCQB: MMNFF) shows what can be achieved by
combining different elements in the cannabis supply chain. The
company sees the product through from cultivation to customers’
hands, all under a carefully managed brand. This summer, it
acquired dispensary and cultivation assets from
Treadwell Simpson Partnership and affiliates, adding facilities
in Florida to those it already owned in California, Nevada, and New
York.
Emerald Health Therapeutics (OTCQX: EMHTF) owns
Agro-Biotech, a licensed cannabis grower with a 75,000-square-foot
indoor facility and plans to add a 500,000-square foot greeQnhouse.
The company also owns 50 percent of Pure SunFarms, which is
converting a licensed existing 1.1 million-square-foot greenhouse
into a full-production commercial resource.
The cannabis sector has matured in recent years. As it grows
within the United States and beyond, acquisitions are allowing
companies to expand their options and strengthen their position in
a powerful new industry.
For more information on Sugarmade, visit Sugarmade, Inc.
(OTCQB: SGMD)
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