One of the largest marijuana retailers in the United States has acquired a “significant” equity stake in an Alberta cannabis producer, a move that could pave the way for other U.S. companies to enter the Canadian market.
Denver-based LivWell Enlightened Health purchased the undisclosed stake in Lethbridge, Alberta-based 51st Parallel, Marijuana Business Daily has learned.
The deal essentially makes the Canadian company a LivWell affiliate.
Executives from the two privately held companies confirmed the transaction but declined to disclose the financial terms of the deal.
The move comes on the heels of U.S. alcohol giant Constellation Brands’ landmark purchase last month of a 9.9% stake in Canada’s Canopy Growth, the world’s largest medical marijuana company.
LivWell is a medical and recreational marijuana retailer that operates 14 stores across Colorado and plans to open another in Oregon. The company also operates its own cultivation facilities and employs about 600 hundred people.
51st Parallel is awaiting approval from the Canadian government to become a licensed marijuana producer. It plans to begin building new cultivation facilities early next year in Alberta.
LivWell’s deal is believed to be first time an American cannabis company has made a strategic move into Canada with the possibility of establishing an integrated business that offers both production and retail operations.
Khurram Malik – a partner with Jacob Capital Management – anticipates more such deals could be in the pipeline, particularly for strategic value plays involving a Canadian producer that has yet to be licensed. A prospective licensee typically carries a much lower price tag than a fully licensed producer.
“If they buy cheap and build aggressively, they could be a significant player in 18 months without playing 10 times the price for it,” Malik said. “None of the big players who have been in the medical market for a while have sold recreational product yet, so for someone to come in with capital, means and distribution know-how is not that far behind.”
Malik – a co-founder of Toronto-based Catalyst Group, a cannabis cultivation platform for late-stage LP applicants – added: “I anticipate quite a bit more acquisitions as we go along.”
Under the deal, which was in the works for more than a year, LivWell will become a third-party operator of 51st’s cultivation facility for five years. Also, 51st has a license to LivWell’s operational intellectual property in perpetuity.
LivWell is providing everything from consulting on facility design to quality control once production commences.
The two companies also have an agreement to negotiate retail branding and retail operational intellectual properties if Alberta, or any other province, opens the door to privately owned marijuana dispensaries.
The deal involves LivWell being paid partly in equity for the services it agreed to render.
Dean Heizer, LivWell’s executive director, said Canada’s predictable and reasonable government regulations make it an attractive market.
“It’s a market that will be rationally regulated on the adult-use side, and it’s a market that will treat marijuana businesses from a tax and regulatory standpoint like other legitimate businesses in Canada,” he said.
“Unlike the way the United States treats marijuana businesses as felons from a tax perspective.”
With help from LivWell, 51st will break ground on its 80,000-square-foot greenhouse in Lethbridge, Alberta, in February.
It aims to get its cultivation license as soon as possible, subject to Health Canada’s approval process. 51st is currently in the review stage.
The company anticipates 4,000 kilograms of marijuana production annually and is going only after the rec market.
“It represents a gigantic step in the growth of our business and will quickly move us along the learning curve relative to all of our peers,” said Jason Kujath, co-founder and president of 51st.
“We see it as being very significant. (The deal with LivWell) is going provide us many years of experience in operational capacity.”
Just the beginning
Analysts say Constellation’s 245 million Canadian dollars ($190 million) investment in Canopy opened the door to significant American investments in the Canadian marijuana space.
Such acquisitions reflect growing competition to lock up assets ahead of Canada’s legalization of adult-use cannabis next year.
Investors also are attracted to Canada’s more predictable regulatory climate.
Neil Maruoka and Matt Bottomley, analysts with Canaccord Genuity in Toronto, see more deals over the horizon involving companies both big and small.
They said large beer, tobacco or pharmaceutical companies trying to get into the cannabis space will probably have to invest hundreds of millions of dollars to make any purchase worth their while.
There are only a handful of companies in Canada, however, that are big enough to absorb that kind of investment and maintain managerial control.
On the other hand, for companies looking to get access to the Canadian market, smaller targets could be an attractive option.
“The idea of getting a toehold in the Canadian market, where you could invest afterwards and grow that capacity, could be attractive to some of these smaller players — guys who just want to get access,” they said.