What happened: BevCanna Enterprises Inc. (CSE:BEV) has bought Naturo Group Investments Inc. in an all-share transaction worth around $20 million.
Why it matters: It shows continued consolidation in the cannabis sector, and interest in the cannabinoid-infused drinks niche despite Canadian law restricting consumers to buying a maximum of five 355-millilitre cans at any one time.
Two Vancouver companies have executed a $20 million consolidation that executives say better prepares the combined venture for making and selling cannabis-infused beverages, among other products.
BevCanna Enterprises Inc. (CSE:BEV) will have plenty of competition to make those mind-altering drinks even after closing an all-share deal to buy Naturo Group Investments Inc.
Dominance in the CBD- and THC-infused drink niche, within the cannabis sector, has yet to be realized for any major player as countless businesses in the past few years have crafted plans to compete.
One thing sector observers say holds back growth for cannabis-infused drinks is Health Canada’s requirement that consumers may buy a maximum of five individually canned beverages at one time.
That same consumer, in contrast, may buy an unlimited number of canned alcoholic drinks in one transaction.
BevCanna’s CEO Marcello Leone told BIV that the all-share transaction to buy Naturo was valued at about $20 million – 50 million shares at $0.40 each.
The two companies have been partners in a licensing agreement since 2018, and Leone said the cost savings of becoming more than partners, and merging, were significantly greater than had the two companies simply remained in a licensing agreement.
“With cost savings, and our management teams’ expenses, etcetera, it saves us over the first two years close to $2 million in operations,” said Leone, who also has a history in the retail fashion business. “For both companies it makes good sense.”
Naturo’s main assets were a 40,000-square-foot bottling facility in Osoyoos, and 315,000 acres of land ready for cultivation. It produces a range of non-cannabis infused health beverages that are branded Trace.
One unusual thing about the deal is that Leone has deep connections with both companies. He has been CEO at BevCanna since 2018, which was six years after he founded Naturo. He continued to be a minority shareholder in Naturo until the company was acquired.
As such, he stressed to BIV that he recused himself from negotiations and all decision-making related to the deal.
“You completely abstain from it,” Leone said. “It goes through the board. You have to abstain from the board. [The deal required] independent valuations, and it becomes a decision that the board has to make.”
BevCanna is in the application phase of getting a licence from Health Canada to allow it to make and sell cannabis-infused drinks, but because it does not yet have that licence, it has no revenue from those products.
In September, however, it spent $6 million to buy B.C.-based Natural Pure Therapy Products Corp., which sells a range of natural health products, such as hemp CBD in creams, capsules and tinctures via e-commerce.
Leone said what is now the Pure Therapy division generated about $6 million in revenue in the past year, and he expects sales to rise to $7 million in 2021.
And while Leone envisions steep revenue growth from selling cannabis-infused drinks, that niche remains a small part of the overall cannabis market, or about 1.9% of all Canadian cannabis sales, Ottawa-based licensed cannabis producer Hexo Corp.’s CEO, Sebastien St. Louis, said on a December 14 conference call with analysts.
Despite what would seem to be a tiny component of the cannabis sector, St. Louis called 1.9% a “significant milestone,” and added that his company has “just taken the No. 1 position in beverage.”
Hexo (NYSE:HEXO) partnered with Molson Coors Canada to launch the Truss line of cannabis-infused drinks in August.
Industry observer, and CEO of Meteria Ventures, Deepak Anand, told BIV that he does not foresee significant growth for drinks infused with cannabinoids unless Health Canada changes its law and allows customers to buy more than five 355-millilitre cans at any one time.
Health Canada’s mechanism for determining maximum limits on purchases is based on weight, he explained. The result is that consumers are able to purchase at one time a much higher number of packages of concentrates, which have much higher levels of THC, CBD or other cannabinoids. The maximum limit at one time to purchase powdered concentrates would be much higher, according to Health Canada’s formula.
“I don't see [the cannabis-infused drinks niche] growing to a significant extent without a regulatory change,” Anand said.
If that change comes – one that Leone is confident will happen – Anand envisions the category increasing to be up to around 12% of total cannabis sales.
“This will be a highly fought-for category,” St. Louis said on the conference call. “It’ll be much more important to the industry than anyone realizes so far.”
Health Canada on December 11 launched consultations with industry for potential changes to cannabis regulations that may see a change to the rules around cannabis-drink sales limits.