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.
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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