ALEAFIA SET TO EXPAND CLINIC NETWORK

Friendly deal with Emblem seen as catalyst

TORONTO • In the first significant sign of consolidation in the Canadian marijuana sector since legalization, Aleafia Health Inc. announced Wednesday it will be scooping up Emblem Corp. in a $173-million allstock deal the companies say will create the largest network of medical cannabis clinics across Canada.

“We were looking to buy a business that had high margin products, was medically focused and that was producing today. Emblem stood out,” Aleafia chief executive Geoffrey Benic said.

Aleafia is a mid-sized, medicallyfocused cannabis company that operates 22 clinics, servicing 60,000 patients, according to the company, but has yet to obtain a Health Canada licence to sell recreational cannabis.

“You know it’s a process and it’s a number of steps that you have to complete on a consistent basis. We are well down that path, and I think our sales licence is imminent. But our thesis is consolidate, or get left behind,” Benic explained.

Emblem has a presence in both the medical and adult-use markets — it’s recreational brand Symbl is sold in Ontario, Alberta, Saskatchewan and British Columbia. Perhaps more importantly, Emblem is one of six licensed producers that has a supply agreement with Shoppers Drug Mart, which recently received the green light from Health Canada to sell medical cannabis online.

“We started chatting with Aleafia about seven to eight weeks ago and saw an immediate benefit there. They had what we were looking for — the strength to bring patients into clinics. We saw that we could bring a lot of those patients to Emblem,” said Emblem CEO Nick Dean.

The news of the acquisition provided a significant boost to Emblem’s stock which had been losing value in the post-legalization era, as investor euphoria toward pot stocks subsides.

Emblem’s shares jumped 12 per cent in the first few hours of trading, while Aleafia shares dropped slightly.

“Part of the reason why Aleafia needed to shop around was because they needed to expand their capacity and get bigger, but it was probably not easy to find investors in the current climate,” said Khurram Malik, head of research at Jacob Capital Management.

“Acquiring is a more expensive route to growing your company but, in a way, it’s faster. You’re paying upfront to buy existing infrastructure, and you don’t have to wait for money to build it out yourself.”

Aleafia has operational facilities in Port Perry, Ont., and in the Niagara region, and an additional facility in Scugog, Ont., which is going through a 150,000-square-foot expansion. At full capacity, these facilities will produce 98,000 kilograms of dried flower, according to Benic. He expects the Emblem acquisition to increase capacity by 40,000 kilograms annually.

“I can’t disclose how much we are producing right now, but I can tell you that by mid to late-2019, we expect our capacity to be 138,000 kilograms,” Benic said.

Just recently, the Ontario government announced it would be limiting the number of retail licenses to just 25 due to a “severe supply shortage” of cannabis — some retailers have said that they have had trouble getting licensed producers to meet their supply commitments.

“I can tell you that a lot of licensed producers overcommitted and fell short of those commitments. We have not had a problem meeting any of our supply commitments to the provinces we have agreements with,” said Emblem’s Dean.

“I think you’re going to see a lot of consolidation in this sector in 2019. Companies are going to look at how this acquisition performs, and try to replicate it,” said Malik.

After the acquisition, existing Emblem shareholders will hold a 41 per cent stake in the combined company, while Aleafia’s shareholders will own the remaining 59 per cent.