Tweed Buys Out Bedrocan in M&A Opening Salvo

On June 24, 2015, it was announced that two of the biggest brands in the burgeoning Canadian cannabis market are about be under one roof. Tweed Marijuana Inc. (TSXV: TWD) has agreed to acquire all the outstanding shares of Bedrocan Canada (TSXV: BED) in an all-stock deal valued at approximately $60 million.

The friendly deal, not a hostile takeover, will combine Tweed, the largest individual producer and biggest consumer brand in the country, with the Bedrocan Canada brand, which is an extension of longstanding Dutch producer Bedrocan BV and is well known for its pharmaceutical-grade product consistency and regimented grow processes.


Deal Specifics

Tweed, which was already the largest market capitalized company in the Canadian MMPR space, will be acquiring all the outstanding shares of Bedrocan Canada for a price of $54 million or $0.84/sh, a 25% premium to Bedrocan’s closing price of $0.66 the day before the deal was announced. The final deal price will float based on the price of Tweed shares in the coming weeks, as each Bedrocan investor will receive a set percentage of Tweed shares for each Bedrocan share owned. Bedrocan will also get to send two people to the combined company’s Board of Directors.

Investors also liked the deal for Tweed, bidding up shares of the buyer by 14% on Wednesday. While this is not unheard of, and increasingly common in U.S. stocks the past year, it is noteworthy that the shares of the buyer rose by such a large percentage. This investor blessing will help Tweed immensely, as it still needs to issue approximately 34 million shares to finance the purchase; the higher the price of Tweed stock, the easier it generally is to get such a deal done smoothly.

The deal is expected to close in August of 2015. The combined company will be the Canadian leader in licensed production capacity, currently about 6,000 kg/yr, and market share, roughly 25% of MMPR patients. As noted by Tweed CEO Bruce Linton, “Once you’ve delineated exactly who’s No. 1, I think a lot of the support will follow to that direction from patients and capital markets.”

Linton believes that the combined company, which will have three production facilities in Ontario and more than 500,000 square feet of potential growing capacity, will emerge as the low cost, strain-diverse, and patient-friendly market leader. But Linton is eyeing even more scale, noting in recent comments that he’s on the lookout for another company or two to bring into the fold. In line with this consolidation, Tweed Marijuana will change its corporate name at its annual shareholder meeting to “reflect its evolution as a multi-brand holding company.”


Combined Focus on Physician Outreach, International Growth

One of the biggest problems facing Canadian producers is that the physician community and the nation’s health regulatory bodies refuse to openly accept the efficacy of cannabis. Health Canada has said as much explicitly many times over the past few years. Going out onto the physician circuits to promote the science behind cannabis was something Bedrocan really excelled at, which is the main reason why Tweed will be keeping the Bedrocan Canada brand intact.

Operating leaders like Tweed and Bedrocan now have the shared responsibility for making their case to the physician community directly. Tweed was obviously heading in this direction, as noted in company press releases earlier this year. They’ll look to lean on the brand awareness Bedrocan has already established while also leveraging the licensing model Bedrocan NV uses to supply its Canadian offshoot.

Other nations, especially in South America, are using Canada’s MMPR as a model for developing their own nationwide cannabis programs. Being the Canadian leaders in licensing deals, Bedrocan should be a key asset as the combined company looks to tap into export markets one day. Bedrocan Canada CEO Marc Wayne noted, “We’re getting phone calls from territories that are looking for credible companies to come in.”

The recent Supreme Court ruling in favor of allowing edibles and other cannabis “derivatives” also played a role in Tweed’s decision to do this deal now, and really try to scale production costs and achieve the “biggest mover” advantage. M Partners analyst Daniel Pearlstein ventures that if Canadian licensed producers were allowed to start selling these products, they could drastically increase sales and profitability while also possibly helping their work with physician education, adding:

“We believe it is likely that a patient- or medical-focused group also pushes the concentrates argument given that doctors want to dose better and how children and the elderly should not be forced to smoke. We believe that eventually Canadian physicians will come around to prescribing cannabis to patients but as mentioned earlier part of the issue right now is that physicians may not know exactly how to prescribe, dose, or monitor this drug. We believe that Canadian physicians will prefer to prescribe an oil or concentrate (in a pill for example) with a specific milligram dosages of THC and CBD which is much easier to prescribe and monitor, and certainly less harmful, compared to smoked cannabis.”

We discussed the potential ramifications of the Supreme Court ruling in our data-driven look at the Canadian LPs last week, and concur with M Partners’ assessment.


Growing Up Before Our Eyes

It is refreshing to see an actual merger in the cannabis space, rather than a reverse merger of some washed up mining company. This is just good old-fashioned M&A activity, and it is a clear sign of a maturing industry—one where the leading players see enough of a runway ahead to make bold, strategic moves with a long-term focus.

Also, considering the longstanding thought that an eventual wave of M&A will come from large, “outside” players looking to enter “A.L.,” after legalization—like stalwarts from the consumer products, tobacco, and spirits industries—we believe that initial consolidation within the Canadian ranks puts these producers in the best position to dictate the future on their own terms.

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