Hiku-WeedMD merger unites hipsters, seniors

TORONTO • With its pricey coffeeshops and minimalist esthetic, retail cannabis brand Tokyo Smoke is aimed squarely at the young, urban hipster. On Thursday, however, Tokyo Smoke’s parent company

announced an acquisition that gives it exposure to a very different demographic: seniors with achy backs or knobbly knees.

Hiku is acquiring medical marijuana company ina shares-only transaction worth roughly $240 million. WeedMD shareholders will receive 1.4185 Hiku shares for each of their own shares, amounting to around $2.38 per WeedMD share, based on share prices at the market close on Thursday.

After the merger, Hiku shareholders will own approximately 51.75 per cent of the joint company while WeedMD shareholders will take 48.25 per cent, according to a company press release.

“(We) focus on these spaces that are untouched niches, that other LPs are not laser-focused on,” Hiku chief executive Alan Gertner told a cannabis investing conference hosted by GMP Securities in Toronto.

“WeedMD is focused on seniors, and carved out an impactful and thoughtful niche targeting a market that should see less (price) compression, targeting an audience that should demand a material amount of cannabis,” Gertner said.

WeedMD has developed a cannabis oil product, Axis, targeted at seniors.

According to its most recent prospectus, from January, it has signed supply agreements for 29 long-term care homes and retirement lodges.

The company operates a 25,000-square-foot facility in Aylmer, Ont. capable of producing 1,500 kilograms of marijuana a year, and is developing a second larger facility in Strathroy, Ont.

The pairing of a trendy retail brand with one focused on senior medical care may seem odd at first. But WeedMD provides Hiku with more supply, broadening its in-house marijuana source beyond DOJA Cannabis Co. Ltd., the Kelowna B.C.based licensed producer that merged with Tokyo Smoke in January to create Hiku.

Besides, the two companies have experience working together. WeedMD already grows and sells cannabis under Hiku’s female-focused brand Van der Pop. That branding agreement, announced last summer and finalized in November, saw Tokyo Smoke, before the merger that created Hiku, taking a significant stake in WeedMD.

WeedMD also brings to the partnership a recently announced joint venture with cannabis drink developer Phivida Holdings Inc. In March, WeedMD and Phivida, said they were planning to develop a new beverage company, Cannabis Beverages Inc., that will be run out of the Strathroy facility, if and when cannabis drinks become legal.

From Hiku’s perspective, the deal brings a broader portfolio of products and widens its customer base. According to Gertner, it also provides Hiku with a production partner able to ramp up or slow down growing depending on pricing pressures in the coming years.

“The lease that WeedMD has with their Strathroy facility allows an immense amount of flexibility for the combined Hiku business to both produce vertically integrated product, but to remain flexible,” said Gertner. “Ultimately we believe in a thesis that wholesale prices will go down, so we want to be able to switch on and switch off our ability to grow a substantial amount of cannabis.”

Hiku’s main focus is on cannabis retailing, and the company hopes to have between 20 and 30 retail locations open by the end of the year in provinces, including Alberta, Manitoba and Newfoundland and Labrador, that allow private dispensaries.

The deal with WeedMD is the first sizable Canadian cannabis merger in several months.

During the trading frenzy that gripped the market at the beginning of the year, two massive M&A deals — between Aurora Cannabis Inc. and CanniMed Therapeutics Inc. on the one hand and Aphria Inc. and Nuuvera Inc. on the other — had commentators predicting more mergers would follow in short order. M&A activity has not, however, happened en masse, as the market remains sluggish for the third month in a row.

Trading of both WeedMD and Hiku stock was halted for most of Thursday. After trading resumed in the afternoon, WeedMD shares shot up 25 per cent from $1.61 to $1.98. Hiku’s stock declined 5.6 per cent from $1.85 to $1.68.