Two of Canada’s largest medical marijuana firms are combining in a deal that will create a dominant domestic producer and reshape the fledgling industry.
Tweed Marijuana Inc. and Bedrocan Cannabis Corp. have agreed to merge, the companies said. It is an all-stock acquisition by Tweed that values Bedrocan at about $58 million, or 84 cents a share, compared to its closing price of 66 cents on Tuesday.
It is the first merger to occur in Canada’s medical marijuana space since the sector got off the ground last year, and it is a game-changer. The combined company will be the industry’s undisputed leader, with more than 25 per cent of all the registered patients and production capacity across the country. It will have three production facilities in Ontario, and a total licensed sales capacity roughly 6,000 kilograms of medical pot per year. The combined market cap of the two firms is triple the size of its closest rivals.
This is the sort of transaction investors have been waiting for. When the federal government implemented new rules in April 2014 that required patients to buy medical marijuana from licensed producers, it triggered a frenzy as dozens of new entrants jumped into the business. Consolidation is viewed as essential to get the sector down to a handful of quality firms with broad product lines.
“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,” Tweed co-founder and chief executive Bruce Linton said in an interview.
Toronto-based Bedrocan and Smiths Falls, Ont.-based Tweed said their businesses are complementary. Tweed, which was the first publicly traded marijuana company to get licensed by Health Canada, has a strong consumer focus and a lot of capital markets experience. Bedrocan, on the other hand, is all about science. The company’s Dutch licensor, Bedrocan BV, has been in the industry for decades and is recognized for producing standardized, high-quality products to treat a variety of illnesses. Bedrocan Canada has said its new facility in the Toronto area is the most advanced of its kind in the world.
“For anybody observing the sector, there was a brand (Tweed) which was a conversation, and there was a brand (Bedrocan) which has a medical-oriented strength,” Linton said.
“It was very obvious to us that you could put the two together and dominate the market, because it would give every patient and doctor options and access that resonate with one audience or the other.”
In addition to becoming a dominant player here at home, Tweed and Bedrocan see this deal as a stepping stone to international growth. Other countries are following Canada’s model in developing regulations for medical marijuana use, and Tweed and Bedrocan want to participate early on in that process. South America is one region they plan to target initially.
“We’re getting phone calls from territories that are looking for credible companies to come in,” said Marc Wayne, Bedrocan’s CEO.
From a capital markets perspective, there is hope that this transaction will increase the profile of both companies and draw more institutional investors.
The medical marijuana business is barely a year old, and companies are just starting to become cash flow positive this year. A lot of wary investors stayed on the sidelines last year as a giant marijuana stock bubble formed and popped. But this deal gives them a clear market leader to invest in, and shows the industry is starting to mature.
The transaction is expected to close in August 2015. Bedrocan’s financial advisers are Dundee Capital Markets Inc. and PowerOne Capital Markets Ltd., while its legal advisor is Cassels Brock & Blackwell LLP. Tweed’s financial advisor is GMP Securities Ltd., and it received legal advice from LaBarge Weinstein LLP.