CannabisNewsWire
Editorial Coverage: The cannabis sector continues its steady
shift toward big business, big money and a focus on the value add
of immaterial assets.
TransCanna Holdings Inc. (CSE: TCAN) (FRA: TH8)
(TCAN
Profile) has made several key acquisitions, creating a
large operation with various licenses and recognized brands.
HEXO Corp. (TSX: HEXO) (NYSE American: HEXO) has
taken a similar path with the acquisition of Newstrike.
Canopy Growth Corporation (TSX: WEED) (NYSE: CGC)
is building a positive public profile through releasing educational
tools. Aphria Inc. (TSX: APHA) (NYSE: APHA) has
expanded the hunt for cultivation licenses to Germany. Meanwhile,
companies such as Charlotte’s Web Holdings Inc. (TSX: CWEB)
(OTCQX: CWBHF) keep releasing new products into the
market.
- Cannabis companies are increasingly engaging in
multimillion-dollar acquisitions.
- These support a consolidation of the industry as it moves from
scattered creativity to efficient large businesses.
- The trend built in part on intangible assets, including brands
and licenses.
To view an infographic of this editorial, click here.
A Very Different Business
The image of the cannabis industry varies hugely depending upon
one’s point of view. To proponents, the market is a radical and
transformative sector that’s bringing the world together. For
opponents, it is one more vice threatening public morals. For many
in the middle ground, it’s a space where hippies and stoners can
thrive, though not one that encourages the buzz and dynamism of
mainstream business.
In reality, the cannabis sector fits none of these images. The
industry is emerging from its early, tentative steps into legality
to become a significant business sector much like any other, with
all the apparatus of modern capitalism and a focus on intangible
assets such as intellectual property. All of this is reflected in
the sector’s recent burst of mergers and acquisitions.
Big Money Deals
The most eye-catching aspect of mergers and acquisitions in the
cannabis sector is the amount of money that goes into them. Take
just two recent examples from a single company, TransCanna
Holdings Inc. (CSE: TCAN) (FRA: TH8). In the past few
months, the Vancouver-based cannabis company has made announcements
on two major deals. First came the acquisition
of a 196,000-square-foot vertically integrated cannabis
facility for a total purchase price of $15 million. Then came a
letter of intent relating to Californian company Lyfted Farms
outlining TransCanna’s plans to acquire Lyfted’s
business and assets for $5.5 million.
By the standards of some businesses, these might not seem like
huge deals. But when a company is investing $20 million on
expansion in the space of a couple of months, that certainly says
something. That TransCanna can make these deals is a show not only
of the strength of the company but also the strength of the
industry.
The idea that there’s a lot of money in cannabis might not be
surprising to anyone who’s seen TV depictions of the drug trade.
Dramas such as Narcos show a world of high earners with
big stacks of cash. But as sociologists such as Sudhir Venkatesh
have shown, the reality for most people working in the illegal drug
trade is vastly different. They earn less than minimum wage in jobs
that are dangerous and uncertain.
The financial growth of the legal cannabis industry has
therefore been a positive move for everyone from company leaders to
their lowest-paid employees. The legalized trade is pulling money
out of the black-market economy and allowing those at the top to
earn big bucks while also providing employees with a decent wage.
Far from weakening the power of legal providers, paying employees
properly is leaving them with enough money to go around buying up
competitors, as TransCanna is doing.
Success has also brought funds from outside. From private
individuals to big alcohol and tobacco companies, investors are
pouring money into pot, allowing businesses to expand while keeping
their employees happy. There are living wages at the bottom and big
money at the top.
Tidying Up the Market
The growth of the legal cannabis industry started with a
scattershot approach. TransCanna is just one of many companies that
have grown into the market from relatively small beginnings. Some
began with entrepreneurs seeing a new industry within which to
operate. Others were experienced cannabis cultivators moving from
the illegal to the legal market. Still others were pharmaceutical
companies dipping their toes into a new medicine and, from there,
into the recreational industry.
As a result, the cannabis industry is cluttered with diverse and
disconnected businesses. But now it’s moving on from this
scatter-gun approach to a period of consolidation.
This doesn’t mean that the variety created in that early surge
is being lost. When larger companies buy up smaller ones, it’s
often with the aim of continuing the individual brands and styles
the smaller companies have created. For example, TransCanna has
announced the acquisition of GoodFellas, which will allow it to
take control of
the Daily Cannabis Goods brand. TransCanna CEO Jim Pakulis has
talked not in terms of absorbing the Daily brand into TransCanna’s
existing identity but in terms of maintaining Daily and expanding
its sales.
The consolidation of multiple brands and businesses into a
smaller number reflects a dialectic process that’s common in new
business areas. First comes a burst of creativity. With few
precedents and no big players dominating the market, entrepreneurs
and creatives have free rein. Some of their experiments fail, but
the ones that succeed get consumers interested and fill the market
with ideas.
While this creates plenty of exciting idea and products, it’s
also inefficient. In the phase that follows, bigger companies step
in or emerge from among the smaller ones. Consolidation creates
efficiency, providing more reliable products for consumers and
better value for companies.
The contrasting approaches of small innovative companies and
larger efficient ones together create excellent value. That’s the
point the cannabis industry is now approaching and that TranCanna’s
acquisitions are a part of.
The Power of the Immaterial
In the illegal market, all that mattered for cannabis sellers
was the product. But in the legal market, things work differently.
When a company can use the full apparatus of marketing, intangible
assets such as intellectual property become important. That’s why
GoodFellas is valuable to a company such as TransCanna — not just
for its cannabis but for the Daily brand that’s attached to it.
And while intangible assets are normally talked about in terms
of brand and IP, there’s another sort of asset that gets much less
publicity and that the cannabis industry is bringing to investors’
attention: legal licenses.
Licenses of various sorts are important for a wide range of
industries, from food production to mining. But they have a
particular prominence in the cannabis industry because tight
regulation has created a scarcity of licenses. When TransCanna
subsidiary TCM Distribution Inc. gained cannabis
manufacturing and distribution permits from the City of Adelanto,
California, it was an important step in the company’s growth
within the state. And when a deal like TransCanna’s acquisition of
Lyfted is announced, the target’s cannabis licenses are often
mentioned. These licenses are a crucial asset and one that
investors are concerned about. Without the licenses, the business
can’t function.
The prominence of licenses is a new feature of investment for
those going into cannabis. But it could be a feature that helps
investors recognize these assets in other companies. Cannabis
companies are increasingly about immaterial assets, and immaterial
assets are increasingly about licenses as well as IP.
Keeping Profiles High
In such an atmosphere, cannabis companies are working hard on
keeping their profiles high while building up their portfolios of
products.
Canadian cannabis company HEXO Corp. (TSX: HEXO) (NYSE
American: HEXO) has, like TransCanna, been using
acquisitions to build up its business. Originally a medical
cannabis provider, HEXO joined the recreational market when Canada
changed its laws last year. Since then, it has completed an
acquisition of Newstrike, the parent company of Up Cannabis
Inc, a licensed producer and distributor. It’s a deal that fits
with the importance of immaterial assets. Licensing is important in
Canada, both for production and distribution, and acquiring a
company that is already licensed is the easiest way to expand a
company’s footprint in the country.
Good publicity is another of the intangible assets that come
with a good company, and few have achieved more publicity within
the sector than Canopy Growth Corporation (TSX: WEED)
(NYSE: CGC). When the company received a
multibillion-dollar investment from Constellation Brands, it was
the first time the sector had received such a big input of cash
from outside, so the move drew substantial attention. Now the
company is raising its profile in a different way, demonstrating
its responsible attitude through the release of
digital cannabis education tools.
Aphria Inc. (TSX: APHA) (NYSE: APHA) has taken
the hunt for intangible assets global, with the acquisition of
five cultivation licenses in Germany. With the North American
cannabis industry increasingly well established, Europe is the next
big frontier, and Aphria is racing in ahead of many of its
competitors.
All this work on intangibles would be useless without physical
products to go with it, and product innovation continues at a high
pace. Charlotte’s Web Holdings Inc. (TSX: CWEB) (OTCQX:
CWBHF) has recently announced the release of
hemp-extract CBD gummies designed help with calm and sleep. CBD
products are an increasingly important subsector of the market, and
products of this kind have potentially wide reach.
The cannabis industry is changing, with big money, consolidation
and growing intangible assets, but it remains grounded in a strong
consumer desire for cannabis.
For more information on TransCanna Holdings, visit TransCanna
Holdings Inc. (CSE: TCAN) (FRA: TH8)
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