Aleafia Health Inc. will acquire Emblem Corp. in an all-stock transaction that was just announced this Wednesday. The transaction — valued at $173 million - is one of the first major acquisitions in Canadian cannabis since the country legalized recreational use in October. At closing, Aleafia and Emblem stockholders will respectively own 59 percent and 41 percent of the newly combined company.
With this acquisition, Aleafia now operates the largest medical marijuana clinic network in Canada. This includes over forty clinics and access to over 60,000 patients, a considerable jump from the 22 clinics and 50,000 patients the company reported on October 9. On top of that, acquiring Emblem marks Aleafia’s official entry into Canada’s recreational market. Aleafia already secured a $10 million investment from Serruya Private Equity to launch twenty retail stores. Now, with Emblem’s highest selling recreational brand Symbl in their portfolio, Aleafia is transforming itself to be a major contender in the market come 2019.
“Our core focus is around patients and dominating the health and wellness space globally,” said Benjamin Ferdinand, CFO at Aleafia, in a recent interview with BNN Bloomberg. “This is only the first step and we’ll continue to scale.”
Emblem acquisition adds 40,0000 kg to Aleafia’s annual supply of cannabis
Before this combination, Aleafia was on track to produce 98,000 kilograms of cannabis after announcing plans to expand their Port Perry cultivation facility. After acquiring Emblem, the pot stock is now set to produce 138,000 kilograms per year. This is a significant increase, as investors will note that any company wanting to compete in this industry will have to produce at least 100,000 kilograms per year.
Supply shortages are a reality in Canadian cannabis. The industry-wide lack of medical and recreational pot is reflected in the 36 percent loss in the Horizon Marijuana Life Sciences Index since October 17. Aleafia and Emblem look just as a pessimistic on the surface too, with shares falling 57 and 39 percent respectively in the past two months. But Aleafia did report $1.6 million in revenue for Q3 of 2018. And the first harvests from their cultivation sites will be coming in the spring and summer of 2019, meaning that this acquisition could not have come at a better time.
“Emblem’s product leadership in the medical and adult-use sectors and highly coveted supply agreements will perfectly complement Aleafia’s cannabis production and clinic operations. This is a transformative transaction that positions Aleafia as a global cannabis leader,” Aleafia CEO Geoffrey Benic clarified in the company’s December 19 press release.
The acquisition ensures that Aleafia will have the supply to meet the demand of both their 60,000 medical patients and their growing market of recreational consumers. While most of their product will be supplied by their Port Perry cultivation site, the acquisition does give Aleafia access to new, high-margin products, including edibles, vapes, topicals, and other cannabis concentrates. These will prove invaluable to the “exponential growth” the company expects to see over the next twelve months.
“Our renowned national brands, robust footprint in emerging value-added products, and strong domestic and international growth opportunities will cement our position of strength in this highly competitive market,” Emblem CEO Nick Dean added in the press release.
Along with a diverse portfolio of medical and recreational products and bountiful cultivation expansions, Aleafia also has access to Emblem’s key supply agreements in four territories as well as five year supply agreement with Aphria Inc. and a distribution agreement with Shoppers Drug Mart. In theory, this acquisition could be the Christmas Miracle the cannabis market was looking for after a rough couple of months. There was speculation that consolidations were on the horizon, and the Aleafia-Emblem transaction may be the first, but it will not be the last. But cannabis investors should not let the good news go to their heads just yet. The year is not over. Optimistic mergers like these are refreshing after weeks of bad news, but in a market plagued by uncertainty, only time will tell if these pot stocks will emerge successful on the other side of 2019.