Another day, another big acquisition in the marijuana sector.
This time it is Whistler Medical Marijuana, with which Aurora Cannabis, Inc. just entered into a letter of intent that will see Aurora acquire the privately-held company for around $175 million.
The all-stock transaction is just one more on a growing list of consolidation that is only going to accelerate this year.
The Race Is On
The early years in the marijuana sector were much like any new and rapidly growing market.
Small companies were launched with private money. They quickly burned through cash to ramp up production and grab consumer market share.
Their share prices were entirely based on the company’s news flow and potential.
Now, especially in Canada, that is changing. The name of the game is to buy out the early success stories and build companies of scale.
The measure of success is transitioning to one where being able to push competitors out of markets through volume, low prices, efficient distribution, and strong branding is essential.
The time for hype is fading. It is time for the potential to turn into profits.
The marijuana companies that plan on selling directly to consumers (as opposed to the ones that are moving towards the pharmaceutical side of the sector) are quickly looking more and more like consumer goods companies.
To put it another way, they’re fighting to be the Coca-Cola of weed, and the race is on to secure the best smaller brands and businesses around.
A Specific Kind Of Deal
If you want a prime example of how this transition to consumer goods-style business is panning out, the deal between Aurora and Whistler is perfect.
Whistler was one of the 10 original licensed producers and the first licensed producer to obtain organic certification. It is a smaller company with strong branding that can be easily acquired in full.
Its product line draws name recognition and a premium price in both medical and retail markets.
Aurora is one of the biggest names in the business. Behind Canopy Growth with a market cap of $12.8 billion and Tilray with $9.3 billion, Aurora is in third with $6.5 billion.
The extra capital Aurora provides pushes Whistler’s strong branding to a much larger market and rapidly ramps up business.
It is just like how Coca-Cola — to stick to this analogy — bought Australia-based Organic & Raw Trading Co., maker of the MOJO kombucha brand, back in September to get in on that trend.
Or how it bought fancy juice maker Odwalla in a $181 million deal way back in 2001. More of a Naked Juice fan? Pepsi bought that one.
Coconut water? Coca-Cola is in on that too with Zico, one of the three original coconut water brands it bought a majority stake of in 2012.
This Whistler deal is just like any of those. It is a big name paying a premium for a small brand with a great reputation that can pull in premium prices on a much larger scale with Aurora’s backing.
The Deals Keep On Coming
In just the first half of 2018, merger and acquisition activity nearly doubled from a year earlier to 145 deals in North America, according to Viridian Capital Advisors.
Then we started to see big names jump in and set up some big deals. The pace and size of these deals is ramping up.
Canopy Growth sold 38% of its stock to Constellation Brands (the owner of Corona and Heineken) for a record-setting $5 billion.
Altria purchased a 45% stake in Cronos for around $1.8 billion, along with a recently announced investment in Juul, the leading vaping company.
AB InBev teamed up with Tilray about a month ago to start a joint venture.
It even leaked that Coca-Cola was looking for an acquisition target.
This trend is only getting started, and it will pay handsomely to own shares of the best buyout targets in the sector this year.
Don’t fall behind the latest trend in one of the fastest growing markets in our lifetimes.
