This is a copy of the July 28th edition of our weekly Newsletter, which we have been publishing since October 2015.
It was less than two years ago that our industry saw its first substantial cross-border cross-industry investment, when Constellation took its initial stake in Canopy Growth. We said at the time that we expected to see a lot more of these, and this week was certainly validation of that thesis. With market participants distracted or even distraught by the trio of negative surprises that have hit us this month, including Canopy Growth suddenly firing Bruce Linton, CannTrust’s shocking betrayal to its patients and investors with its brazen violation of Health Canada’s rules and this week’s flagging of Curaleaf’s CBD marketing by the FDA, it’s easy to miss out on these developments, which we detail below.
We have seen other strategic investments, like Philip Morris into Cronos Group, and there have been several partnerships, such as HEXO Corp with Molson, Green Growth Brands with Simon Property Group and retailers like DSW, American Eagle and Abercrombie & Fitch, and Tilray with both Novartis and with AmBev, but these deals take time to evolve. Constellation’s initial investment into Canopy Growth evolved over the course of almost a year. So, it’s not surprising that we are starting to see other multinational companies now move forward after a period of time that has allowed these companies to develop their strategies and conduct due diligence.
This week’s two investments were with big companies that aren’t exactly household names. Alimentation Couche-Tard, based in Canada, is the largest operator of convenience stores, after commencing operations in 1980. It is also the largest operator of convenience stores in the United States under the Circle K, Corner Store and other brands, and the company, which had fiscal 2019 (April) sales of $59 billion, operates across the world. The company has jumped into a part of the industry that we have highlighted as promising but curiously still not on the radars of most investors, Canadian retail. Their initial investment into Fire & Flower is C$26 million, but the partnership provides for the company to ultimately take over the retailer with a total investment of C$380 million to fund store build-outs. “Couche-Tard is excited to make this strategic investment in one of the fastest growing cannabis ‘pure-play’ retailers,” said Brian Hannasch, President and CEO of Couche-Tard. “This investment in Fire & Flower, with a path to a controlling stake, will enable us to leverage their leadership, network and advanced digital platform to accelerate our journey in this new and flourishing sector.”
British tobacco company Imperial Brands, which reported the equivalent of $38 billion in revenue last year, is taking a 20% stake in Auxly (formerly Cannabis Wheaton) for $123 million. Auxly will be able to access the Imperial Brands vaping technology as it expands it portfolio of branded derivative products. Matthew Phillips, Imperial’s Chief Development Officer of Imperial Brands, said: “Diversifying our NGP portfolio with this investment provides Imperial with further options for future growth and builds on last year’s investment in Oxford Cannabinoid Technologies. Auxly’s unique assets and capabilities, including strong science and product development credentials, make it an ideal partner for Imperial in the legal Canadian cannabis market.”
We expect to see more partnerships and strategic investments into the industry, with the focus most likely remaining on Canada or CBD in the United States. On its call in mid-June, HEXO Corp CEO Sebastien St-Louis alluded to an additional partnership with Molson Coors in the “near future” to extend to the United States. While Big Alcohol and Big Tobacco have been jumping in, we have been surprised that there hasn’t been a major investment by a pharmaceutical company. GW Pharma is certainly an obvious target, but certain Canadian LPs could make for interesting investments or acquisitions as well.
While the sector has endured significant headwinds this month, we think that investors and operators in the space should stay focused on the longer-term outlook for the industry, which is clearly appealing to several large companies operating outside of it.
Founded in Canada in 2015 with the mission to manufacture products extracted from cannabis to the highest-quality standard for global distribution, MediPharm Labs has been preparing for Cannabis “2.0”, which the company believes will be dominated by advanced derivative consumer products. On Monday, the company’s success to date will be recognized with another milestone as MediPharm Labs will up-list to the Toronto Stock Exchange (TSX) after becoming a top five revenue generating cannabis Company in Canada.
To learn more about Medipharm Labs, a client of New Cannabis Ventures, visit the company’s Investor Dashboard that we maintain on its behalf and click the blue Follow Company button in order to stay up to date with their progress.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
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Written by Alan Brochstein, CFA
New Cannabis Ventures