Canada’s International Cannabis Corp. (OTC:KNHBF) was the world’s first company to receive a cannabis production license for adult consumer use, according to management. The company holds a leading market share in the emerging Uruguayan cannabis market and is pursuing an ambitious expansion strategy to position itself for early mover advantage in other Latin American and in European markets to benefit from the potential liberalization of cannabis regulation. The company has also received a bid from Aurora Cannabis Inc., a leading cannabis company based in Edmonton, Canada. The C$1.95 per share bid represents a roughly 34% premium to the volume-weighted average trading price of ICC Shares on the TSX-V for the 20 days ending August 22, 2018. Moreover, the two companies believe the transaction will establish the combined entity as the industry leader in South America.
In Uruguay, where it has already commenced operations, the company holds a license to produce and distribute medicinal and recreational cannabis and industrial hemp products. As CNN notes, “Uruguay, which legalized the drug nationally in 2013,” was “the first country to legalize recreational marijuana.”
At this point, Uruguay has only authorized two commercial producers: ICC and Simbiosis. Reflecting delays and problems that Simbiosis experienced, according to the Brookings Institution, “for several months, only ICC was supplying the entire commercial market.” The company believes that it enjoys a 70% market share in Uruguay. ICC, which recently launched its Bidiol brand of CBD products, sold 373 kilograms of recreational cannabis in Uruguay in the first six months of 2018, generating approximately $315,644 in revenue.
Forbes indicates that, CBD “is a compound found in cannabis that has gained prominence in recent years for its therapeutic properties. Cannabis advocates have hailed the cannabinoid for its promise in combating seizures, anxiety and myriad other ailments.” Grand View Research notes that, “products like marijuana oil have started gaining traction over the past few years owing to increased effectiveness and safety as compared to smoking.”
Citing The Hemp Business Journal, Forbes notes that the CBD market is estimated to reach $2.1 billion in consumer sales by 2020. By comparison, the total CBD market was $202 million in 2015, according to Forbes. Overall, the legal global marijuana market is expected to reach $146.4 billion by the end of 2025, according to a Grand View Research report, driven by regulatory liberalization in a growing number of markets and rising use of marijuana for medical applications, including treatment of cancer, mental disorders, multiple sclerosis and chronic pain, among others. The report notes that “the number of conditions treated using medical marijuana is growing rapidly, as new patients are added to the market, the demand for medical marijuana is expected to increase multiple folds.” In fact, Grand View Research reports that “medical marijuana emerged as the largest marijuana type segment in 2016 and is estimated to be valued at $100.03 billion by 2025.”
Reflecting the sizable global opportunity, ICC also aspires to benefit from first mover advantage in Europe and throughout South America. Forbes notes that, “countries in Latin American and Europe are increasingly adopting medical cannabis programs.” According to Grand View Research, “legal marijuana has started gaining traction worldwide due to very high demand among consumers and increasing legalization of recreational or medical marijuana in various countries.”
Poland and Greece Form an EU Hub
In addition to its Uruguay operations, the company also holds licenses for medicinal cannabis products in Colombia, Greece and Poland. In Poland, the company recently acquired Polannabis Holdings, giving it access to more than 850 acres of hemp crops. Through a license authorized by the Greek government, ICC also controls 16-acres dedicated to cannabis cultivation. These two markets will serve as the hub for ICC’s European hemp activities targeting the more than 512 million potential consumers in the EU. ICC engaged Sababa Sciences to supervise an expansion initiative within its operations in Poland.
Poland is the 6th largest market in the EU ranked by population, with nearly 38 million people, and Greece is the tenth largest, with almost 11 million. Overall, the EU has more than 512 million people. Polannabis is already generating revenue and ICC expects the transaction to help it to leverage its European distribution network. Specifically, ICC has an exclusive agreement with a European-based pharmaceutical distributor, Cosmos Holdings, to procure and distribute medical cannabis products and cannabis derivatives in approved countries within Cosmos’ distribution network of roughly 35,000 pharmacies across 16 countries. ICC has also entered into agreements for distribution in Germany and Spain.
“Today there is barely a European cannabis market to speak of,” according to Forbes. “Outside of the Netherlands, where cannabis sales are ”tolerated” but not fully legal, all the legal European cannabis markets exist firmly within a medical context.” Nevertheless, the European market is generally expected to hold substantial revenue potential for cannabis companies over time, making early mover advantage important. As Forbes continues, “there are signs that Europe’s market may open soon.”
Expansion Within Latin America
ICC is also developing a distribution in Latin America, as well, beginning with a recent presales agreement to export to Mexico. Mexico legalized medical cannabis In June of 2017. Reflecting its expansion initiatives, ICC is expected to reach an estimated production capacity of 450,000+ kg per annum. The company operates greenhouse facilities, as well as three outdoor grow sites with a potential total area of over 800 acres. ICC’s large-scale extraction facility is ultimately expected to have the capacity to process 150,000 kg of CBD feed per annum and is expected to be operational by late 2018.
Pending Transaction Combines Two Growing Companies
Earlier this month, ICC announced that it had entered into a definitive agreement with Aurora Cannabis Inc., one of the world’s largest cannabis companies with shares that trade on the TSX under the ticker ACB and the OTCQB under the ticker ACBFF. Aurora intends to acquire ICC for C$1.95 per share – which equates to an aggregate purchase price of approximately $290 million – in an all-stock transaction that has been approved by the boards of both companies. The proposed purchase price represents a premium of approximately 34% to the 20 day volume-weighted average trading price of ICC Shares on the TSX-V for the period ending August 22, 2018.
Aurora has engaged in a roll-up strategy within the cannabis industry, acquiring ten companies to-date. Aurora and ICC believe the transaction will establish the combined entity as the industry leader in South America. The companies believe that competitive advantages include ICC’s new CBD extraction facility, which according to management is strategically located near an international airport and in Uruguay’s Science Park free trade zone, which exempts exports from local tax. ICC is also finishing South America’s first high-tech cannabis science laboratory.
If the transaction – which must be approved by the British Columbia Supreme Court and two-thirds of ICC voting shareholders – is consummated, ICC shareholders will receive 0.2448 Aurora Shares for each ICC share. A major ICC shareholder, Union Group International Holdings, owns approximately 29% of ICC shares and has agreed to vote for the transaction. Similarly, ICC insiders, who hold an aggregate roughly 0.4% of ICC shares, have agreed to vote for the deal. ICC’s board is free to consider other offers, but might have to pay a $9.5 million termination fee to Aurora if the deal does not proceed. There is also a potential $1.25 million reverse break fee that Aurora might have to pay to ICC in the event that the deal is not consummated. The transaction is expected to close in 4Q18.
Risks Include Competitive and Regulatory
The growth of the CBD market has drawn other players into the space. Thus, ICC faces competitive risk, as well as potential regulatory, among other risks. The company also faces the risk that shareholders do not vote in favor of the pending Aurora transaction and is required to pay the above-noted fee to Aurora. However, the agreement by a major ICC shareholder and ICC insiders to support the deal would seem to mitigate that risk.
Summary: Rapid Market Expansion and Growing Scale
ICC recently launched its Bidiol brand of CBD products and sold 373 kilograms of recreational cannabis in Uruguay in the first six months of 2018, generating approximately $315,644 in revenue. Reflecting the sizable global opportunity, ICC also aspires to benefit from first mover advantage in Europe and throughout South America. For instance, in addition to its Uruguay operations, the company also holds licenses for medicinal cannabis products in Colombia, Greece and Poland. In Poland, the company recently acquired Polannabis Holdings and has obtained a license from the Greek government. Poland and Greece will serve as the hub for ICC’s European hemp activities targeting the more than 500 million potential consumers in the EU. ICC engaged Sababa Sciences to supervise an expansion initiative within its operations in Poland. Moreover, ICC’s distribution network consists of roughly 35,000 pharmacies throughout the EU, including Germany and Spain. ICC is also developing a distribution in Latin America, as well, beginning with a recent presales agreement to export to Mexico.
ICC’s pending agreement with Aurora Cannabis is expected to provide ICC shareholders with a premium to the 20-day average trading price of ICC shares, while retaining exposure to the upside of the combined companies’ potential growth. Aurora has engaged in a roll-up strategy within the cannabis industry. Nevertheless, ICC faces competitive, as well as potential regulatory risk, among other risks. There is also the possibility that the deal with Aurora is not consummated.
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