Cannabis Mega-Mergers Re-Mapping Sector’s Post-Legalization Landscape

A flurry of activity that has included billions worth in acquisitions in the legal cannabis market has redrawn the maps, and changed a lot of addresses as the sector winds down its final months ahead of legalization.

The impacts of the last few weeks has seen a landscape shuffle in the cannabis sector, positively changing the outlook of companies including, Aphria Inc. (TSXV: APH) (OTC: APHQF), Aurora Cannabis (TSXV: ACB) (OTC: ACBFF), WeedMD Inc. (TSX.V: WMD) (OTC: WDDMF), and newly-minted Hiku Brands Company Ltd (CSE:HIKU) (OTC: DJACF).

At the center of the latest round of major events has been Ontario-based Aphria Inc. (TSXV: APH) (OTC: APHQF), which recently has been involved in at least three major mergers and acquisitions.

Aphria’s latest activities included acquiring medical cannabis firm Nuuvera Inc. for $826 million; buying craft cannabis producer Broken Coast Cannabis for $230 million; and making a strategic investment in the merger of newly-formed brand-focused licensed cannabis producer Hiku Brands Company Ltd (CSE:HIKU) (OTC: DJACF)—a combination of DOJA Cannabis and Tokyo Smoke.

In just the first month of 2018, there has been over $2 billion worth of cannabis deals, which is nearly quadruple the total of 2017 as a whole—which itself was a record.

However, perhaps the most interesting of the activities, was one with the smallest price tag attached—the merger of DOJA and Tokyo Smoke into Hiku Brands Company Ltd (CSE:HIKU) (OTC: DJACF).

The newly-minted Hiku Brands Company Ltd (CSE:HIKU) (OTC: DJACF) became Canada's first premium cannabis brand house with vertically integrated operations focused on its strengths in branding and marketing—bringing together two CEOs with marketing guru attributes and aspirations.

MERGER MANIA SHATTERING RECORDS

As predicted by CBC News, the Financial Post and Baystreet in the last few months, the cannabis sector has entered into its merger mania phase, showing the early stages of an already maturing industry.

Prior to Aphria’s recent spending spree, it was Aurora Cannabis (TSXV: ACB) (OTC: ACBFF) splashing the market, acquiring CanniMed Therapeutics—for a whopping CAD$1.1 billion (US$852 billion).

Through Aphria and Aurora alone, they’ve conducted over $2 billion worth of deals in January—nearly quadruple last year’s record breaking total over 12 months.

What was seen as a flurry of activity in 2017, led consultancy Ernst & Young to survey nearly a dozen licensed producers (LPs) at the end of the year—leading to the safe prediction of a wave of takeovers and mergers to arise in the months ahead of legalization.

The prediction was that the biggest players would start racing to acquire all the mid-tier and smaller players, leaving only the big boys left in the post-legalization world.

Industry expert Chuck Rifici—former board member of Aurora and founder and CEO of Tweed Inc. (now Canopy)—predicted that the high stock values on the majors makes acquisitions of smaller companies inevitable, by buying smaller players in all-stock deals.

"These smaller companies are in a position to fill in gaps and get a nice premium on their stock and the larger guys are essentially printing cheap paper to do those deals. It's win-win,” Rifici opined to CBC news.

He’s right—The money is indeed there to be spent.

But not all activities need to be full acquisitions, as seen in Aphria’s strategic investment in the merger between DOJA and Tokyo Smoke to form Hiku Brands Company Ltd (CSE:HIKU) (OTC: DJACF).

HIKU AIMS TO PROVE BRANDING IS KING

Between the two companies that merged to form Hiku Brands Company Ltd (CSE:HIKU) (OTC: DJACF, are a pair of CEOs with very successful histories in branding and marketing.

Set to serve as CEO for Hiku will be Alan Gertner, founder of Tokyo Smoke, whose background includes being a founding member of Google’s first Global Business Strategy team, later to lead a +$100 million organization at Google in Asia.

Joining Gertner as President will be Trent Kitsch, co-founder of DOJA, and founder of SAXX Underwear Co., which Kitsch built into a globally recognizable brand, and the fastest growing underwear brand in North America prior to exiting the business in 2015.

The merger is a match made in heaven, as both Gertner’s and Kitsch’s missions for their previous companies focused on image and branding.

Both still hold the firm belief that first impressions among adult recreational cannabis consumers are paramount—Once legalization is fully underway, customers are going to be loyal to their favorite brands, and it’s to the marketing experts to foster that relationship early.

Gertner likens the importance of branding to the early impact made by Starbucks twenty years ago, which started the coffee revolution, educating customers on what a quality cup of coffee looked, smelled, and tasted like.

It’s his company’s goal to become the Starbucks of cannabis, led by possibly the strongest branding team in the entire cannabis sector.

"I am proud to stand with a team of incredibly talented and thoughtful business partners as we launch Hiku and create the first great cannabis brand house." said Gertner, Chief Executive Officer of Hiku. "A brand house, because cannabis is a consumer product, one that we believe can change the world. At Hiku, we look forward to playing a major role in driving this incredible industry forward."

Hiku is built not only on pretty packaging, as each team has brought in its own significant growing expertise.

In October, DOJA began expanding production capacity by acquiring and refitting a 22,580 sq.ft. Kelowna, BC building to be dubbed the “FUTURE LAB.”— destined to produce over 5,000 kgs of cannabis per year.

Beyond that, the company is also backed by ground-breaking supply partnerships with with Aphria Inc. (TSXV: APH) (OTC: APHQF) and WeedMD Inc. (TSX.V: WMD) (OTC: WDDMF), to ensure that Hiku brands can scale in 2018 and beyond.

Thanks to Aphria’s confidence in the latest round of financing for $12.5 million, Hiku’s cash position is approximately $32.6 million as it launches as this fresh entity.

Hiku now operates six Tokyo Smoke shops and one DOJA café across Alberta, British Columbia, and Ontario, which sell coffee, legal cannabis accessories and clothing—all offering a unique retail experience that’s optimized to build brand awareness, and hook into the loyalty of a growing customer base.

Beginning in 2018, Hiku will prioritize its retail expansion in provinces that allow private cannabis retail, as dispensing stores. Totally vertically integrated, Hiku can better control its in-store customer experience, once the legalization of cannabis in Canada is officially underway.

For Hiku and across the entire cannabis sector, 2018 is off to a very hot start.

COMPARABLES

Aphria Inc. (TSXV: APH) (OTC: APHQF)

Aphria is one of Canada’s lowest cost licensed cannabis producers, specializing in the production, suppy, and sale of medical cannabis. The company offers sativa, indica, and hybrid medical marijuana products, as well as cannabis oils. It also provides support services in the form of medical consultations, group therapies, and rehabilitation to veteran and first responders. The company sells its products through its online store or phones, as well as engages in the wholesale shipping of medical marijuana plant cuttings and dried buds to other licensed producers. Aphria Inc. is headquartered in Leamington, Canada.

Aurora Cannabis (TSXV: ACB) (OTC: ACBFF)

Aurora Cannabis boasts the second highest square footage approved for cannabis production in Canada. Together with its subsidiaries, Aurora produces and distributes medical marijuana products in Canada. The company’s products consist of dried cannabis and cannabis oil.

Aurora is the only cannabis producer located in the province of Alberta, giving the company a cost advantage through its free use of fresh mountain-fed water used on site, and housed under the lowest corporate tax rates and power rates in Canada. Capitalizing on numerous farm credit programs provided by the province, Aurora has positioned itself as arguably the lowest cost-per-gram licensed producer in Canada. Aurora became a licensed producer in 2015, and is based in Edmonton, Alberta.

WeedMD Inc. (TSX.V: WMD) (OTC: WDDMF)

WeedMD is a licensed producer of medical cannabis that operates a 26,000 square foot, scalable production facility in Aylmer, Ontario with four acres of property for future expansion. WeedMD is focused on providing consistent, quality medicine to the long-term care and assisted living markets in Canada through its comprehensive platform developed exclusively for that industry. WeedMD is dedicated to educating healthcare practitioners and furthering public understanding of the role medical cannabis can play as a viable alternative to prescription medication in relieving a variety of chronic medical conditions and illnesses.

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