4 Potential Takeout Candidates In The Marijuana Sector

A consolidation wave is sweeping across the marijuana industry, as companies aim to improve their competitive positioning and market share in an industry which offers a lot a promise.

Aurora Cannabis Inc ACBFF recently announced a deal to buy MedReleaf Corp MEDFF in an all-cash transaction valued at C$3.2 billion.

The proposed combination would mean a total funded capacity of over 570,000 kg per year of high-quality facilities in Canada and Denmark.

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Recent Deals In The Space

Aurora itself has been on a buying spree, having bought CanniMed Therapeutics in a C$1.2 billion deal and taken a majority interest in Green Organic Dutchman.

Aphria Inc APHQF announced a deal in January to acquire Nuuvera, which works with partners in Germany, Italy and Israel, for C$826 million in cash and stock. Aphria also bought Vancouver Island-based cannabis producer Coast Cannabis for C$230 million in cash and stock earlier this year.

In an interesting turn, Constellation Brands, Inc. STZ announced last October its intention to pick up a minority stake in Canopy Growth for C$245 million.

Why This Frenetic Deal Pace

M&A activity has perked up in the space in the last couple of years following the widespread legalizing of medical marijuana. To top it, Canada is poised to make the selling of recreational marijuana legal this year.

Sales of recreational marijuana may fetch Canada $5 billion per year to start with, according to estimates by Deloitte. This number goes up to $8.7 billion, if people who are likely to consume are also accounted.

"I think we're going to continue to see a lot more (consolidation)," Alan Brochstein, a cannabis industry analyst and founder of 420 Investor, was quoted as saying to Marijuana Business Daily.

In Canada, there could be continued consolidation among licensed producers, Matthew Karnes, Founder and Managing Partner at GreenWave Advisors, an independent cannabis research and financial analysis firm, told Benzinga.

Karnes sees big alcohol companies picking up financial stakes in marijuana companies, with pharma companies waiting on the sidelines.

Related Link: Kevin O'Leary: Marijuana's Federal Criminality Scares Away Billions In Institutional Money

The momentum in pot stocks is so strong that Canopy Growth is seeking to list its shares on the NYSE under the ticker symbol CGC before the end of May. The company also announced an agreement to buy the 33 percent stake it doesn't already own in its BC Tweed Joint Venture.

"Continued M&A activity and the billions invested in cannabis companies this year signal a maturation of capital market activity in the cannabis sector," said Javier Hasse, Benzinga cannabis reporter and author of "Start Your Own Cannabis Business: Your Step-By-Step Guide to the Marijuana Industry."

"The high level of investments also comes with better conditions to raise money and more comfort among investors," said Hasse.

4 Potential Targets

Maricann Group Inc MRRCF

Maricann Group, which recently picked up Malta's Medican Holdings, a licensed operator, has been discussed as a takeout target for quiet some time now. A March 19 article in Deep Dive pointed to comments by CEO Ben Ward about a potential interest by an undisclosed party, and the appointment of M&A lawyer Clay Horner as counsel to the special committee of Maricann. The company recently announced a foray into the European market through its deal to buy Haxxon AG, a producer of feminized high CBD cannabis plants. In late December, it stitched up a deal to supply cannabis to Canadian pharmacy chain Lovell Drugs.

Emblem Corp EMMBF

Licensed Canadian marijuana producer Emblem that focuses on edible oil and smokeless products could be a viable acquisition target, according to Technical420.com. The reason? Attractive valuation and focus on expansion and cannabis oil.

OrganiGram Holdings Inc OGRMF

The company's recently reported Q1 results showed a record revenue of C$2.4 million and the recent cultivation license expansion it received from Health Canada, which triples its production to 16,000 kg per annum.

Hiku Brands Company Ltd. DJACF

The vertically integrated company formed following the merger of DOJA Cannabis Company and Tokyo Smoke has been on a bulking up spree. It recently announced an agreement to buy WeedMD. There have been whispers that Hiku is also being sought out.

Growing Market

The focus of companies operating out of North America could shift to potential targets in South American countries such as Colombia and Uruguay, according to Hasse. The rationale – license holders will be sought out, as these licenses are limited and have already been handed out.

With the imminent Canadian approval of recreational marijuana and more and more U.S. states legalizing marijuana, the prospects for the industry appears bright.

"In the US, we expect 2018 retail sales of $12.2B up from $8.2B in 2016 and reaching $35B by 2022 based on the expectation that every state will be medical only or fully Legal," said Karnes.