Canopy ramps up retail presence with Tokyo Smoke parent takeover
TORONTO Canopy Growth Corp. is acquiring Hiku Brands Ltd. for about $250 million in an all-stock deal that expands the cannabis grower’s retail footprint and gives it marijuana lifestyle brand Tokyo Smoke.
Shareholders of Hiku, Tokyo Smoke’s parent company, will receive 0.046 of a Canopy share for each of their shares, implying $1.91 per Hiku share, a 33-per-cent premium “based on the 20-day volume weighted average (share) prices ... as of July 9, 2018,” according to a Tuesday afternoon press release.
The deal scuttles a previous $240-million merger between Hiku and licensed producer WeedMD Inc. that was orchestrated back in April. Hiku has paid WeedMD a $10-million termination fee in order to accept Canopy ’s “superior proposal.”
The acquisition is the latest sign of consolidation in Canada’s cannabis sector ahead of recreational legalization in October.
It comes as something of a surprise, given recent statements by Canopy chief executive Bruce Linton implying Canopy wasn’t looking to acquire other publicly traded licensed producers, given steep valuations. However, Hiku is less of a grower than a brand and retail play.
The company was formed in January by a merger between Tokyo Smoke, a hipster coffee shop and marijuana accessory chain based in Toronto, and Kelowna, B.C.based marijuana grower DOJA Cannabis Company Ltd.
Hiku is making aggressive moves in provinces where private cannabis retail stores will be allowed. According to a company update from late June, Hiku has filed applications for 12 storefronts in Calgary and has entered Edmonton’s lottery system for awarding retail licenses.
In Manitoba, Hiku holds one of only four conditional retail licences from the province, which gives it the ability to open between nine and 16 stores. In Newfoundland and Labrador, it says it’s working with a local ACMPR applicant to open five stores.
Canopy is already working to establish a retail store brand, Tweed Main Street. But the Hiku acquisition will boost its retail presence — where margins are expected to remain reasonable, even as cannabis wholesale prices compress — and provide more channels to sell its product.
Given restrictive rules around cannabis branding, packaging and promotion, it could be difficult to create brand awareness in the lead-up to day one of legal sales on Oct. 17.
Tokyo Smoke gives Canopy one of Canada’s few established lifestyle brands focused on legal pot. “Hiku equals brands. Canopy is built on brands. So we combined them,” said Linton, in the press release.
Two-thirds of Hiku shareholders still have to vote to approve the takeover.
However, Hiku’s board of directors is recommending a vote in favour of the deal, and its directors and senior officers, who collectively own 28.5 per cent of the company, have already entered into agreements to support the vote.
Ejected from the deal, WeedMD put on a brave face in a Tuesday press release: “With an additional $10 million in non-dilutive capital and over $50 million in cash, all of our commitments are fully funded and we’re in a solid position financially and operationally to continue executing and delivering on all of our goals and objectives,” said the company ’s chief executive Keith Merker.