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Canopy Growth has agreed to acquire fellow cannabis supplier Hiku for C$269.2 million (about $205.3 million). The deal for the owner of popular pot brand
Tokyo Smoke underscores just how rapidly the cannabis sector is consolidating in anticipation of legal recreational marijuana sales in Canada under the Cannabis Act, which takes effect on October 17.

Inspired by the prospective synergies with Hiku, Canopy chairman and CEO Bruce Linton composed a haiku for the occasion:


Hiku equals brands.
Canopy is built on brands.
So we combined them.

It’s tough to argue with that logic. But the deal also highlights the advantages that publicly traded cannabis companies have over privately held rivals by striking deals in shares over cash.

Hiku’s shareholders will receive 0.046 of a Canopy share for each Hiku share they hold, representing a premium of some 21% on the closing prices of Canopy shares listed on the Toronto Stock Exchange and Hiku shares listed on the Canadian Stock Exchange on July 9, the last day of trading before the deal was announced.

For Hiku’s part, the combination will give it access to Canopy’s recently closed issuance of convertible notes worth some $600 million—capital and liquidity that will support both companies’ continued expansion efforts ahead of full recreational legalization in Canada this fall. Canopy reported C$77.9 million in revenue for the fiscal year ended March 31, a 95% increase YoY, and has C$323 million in cash on hand.

Moreover, the deal will give Hiku exposure to the US equities market, as Canopy is also listed on the New York Stock Exchange. Canopy’s shares have enjoyed an average daily trading volume of approximately 5.4 million, representing C$197 million per day, over the last three months.

The transaction also presents Canopy and Hiku with an integration and expansion opportunity into retail stores located in Canadian provinces where direct consumer sales will be permitted. That includes a pipeline of growth opportunities after Canopy recently secured private brick-and-mortar and online cannabis retail licenses in the provinces of Manitoba, Newfoundland & Labrador, and Saskatchewan.

And companies like Canopy have positioned themselves to take advantage of those opportunities through M&A. The deal will, upon completion, become Canopy’s
14th deal to close since its founding in 2009, per the PitchBook Platform. But it’s by no means the company’s largest. That privilege goes to last year’s deal for medical marijuana specialist Mettrum Health in another all-stock transaction, which totaled some $430 million in value.

Co-founded by father and son Lorne and Alan Gertner in 2015, Tokyo Smoke raised some C$9 million in equity financing from the likes of Globalive Capital and Green Acre Capital—two firms focused on the cannabis space—before forming Hiku.

And Hiku only took shape in January, emerging from the combination of DOJA Cannabis and Tokyo Smoke as part of a YoY wave of consolidation reshaping the cannabis space for the global market, as laws restricting the sale of cannabis products have relaxed in some countries and US states.

Cannabis M&A on a roll

Last year witnessed the completion of
124 transactions for cannabis companies, per PitchBook data, making 2017 the most active year since the start of 2009. But this year is on pace to top that easily, with 108 completed deals already on the books.

Canadian marijuana producers
Aurora Cannabis and
CanniMed Therapeutics struck a C$1.1 billion cash-and-stock combination in January. So sweet was the deal that CanniMed agreed to pay a $9.5 million fee to terminate its planned takeover of 
Newstrike Resources, another cannabis distributor.

Not to be outdone, later that month
Aphria agreed to purchase
Nuuvera for C$8.50 per share, representing a valuation of about C$826 million and a 30.5% premium to Nuuvera’s average weighted share price for the two weeks prior.

Unlike in Canada, cannabis in the US currently occupies something like a Schrödinger superposition: It’s at once illegal nationwide while legal in a number of individual states. This regulatory paradox means that, thus far, most of the action in the cannabis space has taken place north of the border, where banking regulations allow for acquisition financing. But heightened M&A deal activity by Canadian cannabis companies confirms that dealmaking in this space is a relatively recent phenomenon all the same. And it could well be merely a matter of time for US M&A activity to pick up steam.

Shares of Hiku (CSE: HIKU) puffed up some 20%, while shares of Canopy (TSX: WEED) added nearly 3% Wednesday.


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