M&A in the Canadian cannabis industry
May 2018 | EXPERT BRIEFING | MERGERS & ACQUISITIONS
On 13 April 2017, the Canadian government introduced Bill C-45, the proposed Cannabis Act, into the House of Commons. To date, the proposed Act has moved through the House of Commons and has successfully passed its second reading at the Senate by a vote of 44 – 29. The proposed Act is now at the Senate’s Committee Stage where the Standing Senate Committee on Social Affairs, Science and Technology will study it.
In May 2017, just after the introduction of the proposed Act, Health Canada announced that it was modifying the existing application process for producers of medical cannabis under the Access to Cannabis for Medical Purposes Regulations (ACMPR), by making it easier for existing licensed producers to obtain licences for expansions and second sites. Since then, Health Canada has also made changes to expedite the application process for new applicants. The outcome of these changes is, of course, to ensure that licensed producers will be able to meet the surge in demand when the recreational market opens. In 2016, there were only 38 licensed producers in Canada. As of 1 April 2018, that number has risen to 97.
Consolidation in the Canadian cannabis industry, through M&A, is an inevitable result of the legalisation of recreational cannabis. There are, among others, three major types of motivators that are likely to drive consolidation in the industry in the coming years.
Major established licensed producers, like Canopy Growth Corp., have the desire to grow as large as possible to gain a competitive advantage in the recreational market. Canopy began acquiring late-stage ACMPR applicants when legalised recreational cannabis was on the horizon. Canopy acquired a 25 percent interest in licensed producer TerrAscend Corporation in late 2017. As one of the industry’s leaders in the Canadian and global market, Canopy’s moves in the industry continue to solidify its status as such.
Similarly, Aurora Cannabis made a hostile bid for licensed producer CanniMed, which was simultaneously engaged in a friendly takeover of smaller licensed producer Newstrike. In February, Aurora received approval under the Competition Act to acquire CanniMed, and ultimately did so in a friendly agreement that resulted in Aurora receiving 70.7 percent of CanniMed’s shares tendered. The agreement with Aurora meant that CanniMed was required to terminate its agreement with Newstrike, at a break free of $9.5m. The deal was valued at over $1bn and is the largest M&A deal in the Canadian cannabis industry to date.
Another example is licensed producer Aphria Inc.’s acquisition of Broken Coast Cannabis Inc., which was announced in mid-February. In that deal, Aphria acquired 99.86 percent of all of the issued and outstanding Class A common shares of Broken Coast.
Aphria also subsequently closed a $425m deal to acquire Nuuvera Inc., to utilise Nuuvera’s international connections in Italy, Israel and Germany.
It is also predicted that certain licensed producers, of already significant size, will come together in order to ensure that they can remain competitive once the recreational market becomes legal.
Lastly, a number of smaller or newly-licensed producers, late-stage applicants and ancillary businesses, may be enthusiastic about M&A for a variety of reasons. Some, which have just completed the licensing process, may be looking to exit the industry and cash in. Others may not have sufficient capital to execute on envisioned business plans. Many will question whether they can be competitive on a long-term basis on their own.
Licensed producer ABcann Global Corporation acquired Harvest Medicine Cannabis Clinic in February 2018. The transaction made Harvest Medicine a wholly-owned subsidiary of ABcann. ABcann’s stated motivation, like many others, was vertical integration.
On the same day, Hiku Brands Company Ltd acquired its first brand by entering into a letter of intent to acquire 100 percent of outstanding shares of Maïtri Group, a cannabis accessory and design brand.
Many have been predicting that we will see a significant uptick in M&A within the cannabis industry in 2018 and beyond. If the first quarter of 2018 is any indication of what is to come, those predictions appear to be accurate and exciting times lie ahead for the industry.
Matt Maurer is a partner and Whitney Abrams is an associate at Minden Gross LLP. Mr Maurer can be contacted on +1 (416) 369 4322 or by email: firstname.lastname@example.org. Ms Abrams can be contacted on +1 (416) 369 4148 or by email: email@example.com.
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Matt Maurer and Whitney Abrams
Minden Gross LLP