Cannex pursuing U.S. acquisitions to ride the next boom in cannabis markets
Anthony Dutton regularly encounters investors who say they missed an opportunity to get in on the ground floor at some of Canada’s largest cannabis companies. As director and CEO of Vancouver-based Cannex Capital Group (CSE: CNNX/ OTCQB: CNXXF) he’s identifying opportunities in the strengthening cannabis market south of the border to become a multi-state powerhouse across the cannabis supply chain.
“Saying that you missed out on those earliest investment opportunities in the cannabis space is like saying you missed the 1990s tech bubble,” says Dutton. “While you may have missed the tech bubble, you didn’t miss out on a universe of tech investment opportunities based on fundamentals. Cannex is positioning itself to be a leader in the global cannabis space by identifying, acquiring and assisting a portfolio of emerging companies to reach their full potential.”
Cannex’s strategy is currently focusing on four cannabis-friendly U.S. states — Washington, California, Arizona and Nevada — to acquire a diverse portfolio of brand-focused companies that are already successfully negotiating their local cannabis markets. Acquisitions will focus on all aspects of the industry, including premium indoor cultivation, extraction, manufacturing of edible and other derivative products, distribution and retail operations. Cannex will provide real estate, management, financial, branding and IP services to licensed and state-compliant cannabis businesses through its wholly-owned U.S. subsidiaries.
Earlier this year, Cannex set out to raise $25 million but instead nearly doubled that target with $48.2 million, one of the largest institutionally-led public financings for a Canadian issuer with a U.S. focus.
Cannex’s first acquisition was BrightLeaf Development, the owner of turnkey real estate leased by NWCS (Northwest Cannabis Solutions), the state of Washington’s largest cannabis producer and processor and a state leader in sales, branding and marketing. Through Cannex’s BrightLeaf holding company, NWCS has the exclusive right to sell brands, package designs and recipes for many of Washington’s best-selling brands, including edibles, flower brands and concentrates.
“We were attracted to NWCS because we were impressed not only by the company’s operational expertise in cultivation and processing, but because of its focus on brands,” says Dutton. “We have no intention of becoming a grower of bulk cannabis at massive greenhouses. For consumers, mass-produced packaged products with weak brands will be judged primarily on price. We’re working with companies such as NWCS to develop brand loyalty for boutique products licensed exclusively by Cannex.”
For Dutton, branding is much more than wrapping a name and marketing campaign around a product. Cannex uses its expertise to help companies to deliver a consistent product to fulfill the brand’s promise.
“Without that consistency, the value of the brand equity will quickly disappear,” says Dutton. “By leveraging the operational underpinnings we can provide, Cannex can help its acquisitions and strategic partners to not only offer that consistency and reliability, but to do that at scale.”
Jerry Derevyanny is COO of BrightLeaf Development and a director at Cannex who formerly served as general counsel to NWCS. He notes that while the U.S. regulatory regime for cannabis doesn’t mirror that of Canada’s, it’s entirely negotiable. The minor political risk he perceives in the U.S. market is already baked into Cannex’s business plan.
“Each individual state has the right to set its own policy regarding medical and recreational cannabis availability,” he says. “But we’re seeing a groundswell of support for legalized cannabis across the country and we don’t see cannabis-friendly states backtracking on availability. Of the four states we’re initially concentrating on, California alone represents a larger market than Canada.”
Cannex’s pending acquisition, California’s Jetty Extracts, is a brand-centric company focusing on a line of consumer products that includes vaporizer cartridges, pods and edibles.
“We look at acquisitions such as Jetty Extracts and see a solid strategic acquisition that will create organic growth,” says Derevyanny. “Our acquisitions don’t need to be the biggest in the market, but they need to show the potential for being the best at what they do. We can apply what we’ve already learned and help those companies to optimize their operations.”
The California market for medical-only cannabis topped out at US$2.8 billion in 2017. The combined medical and recreational markets are projected at US$6.8 billion by 2021. As the regulations around cannabis in additional states are liberalized, Bloomberg Markets estimates that the value of the legal U.S. market could grow to US$50 billion over the next decade.
“Over that same time period, we see the global market growing to as much as US$180 billion,” says Dutton. “We intend to take a bite out of that global market as well. But we’ll get there by acquiring cannabis-related companies that demonstrate sound fundamentals and efficient operations. Organic growth will take us there.”
CANNEX IS POSITIONING ITSELF TO BE A LEADER IN THE GLOBAL CANNABIS SPACE BY IDENTIFYING, ACQUIRING AND ASSISTING A PORTFOLIO OF EMERGING COMPANIES TO REACH THEIR FULL POTENTIAL