Strategic acquisition positions RotoGro in Canada's recreational cannabis market

Roto-Gro International Limited (ASX:RGI) has today taken a step forward with its strategic growth plan to establish itself as a global leader in the cultivation of cannabis and perishable foods, announcing that it is in the process of acquiring Supra HC — a holder of a Health Canada issued cannabis Dealer’s Licence.

RGI entered into a definitive share purchase agreement (SPA) with Valens GroWorks Corp. (CSE:VGW) to acquire all of the issued and outstanding shares in the capital stock of Supra THC Services Inc.

The development is a major coup for RGI, with the deal giving the company cultivation, technology and agricultural services that generate revenue in their own right. Under the agreement, both RGI and VGW will collaborate on an offtake agreement for the sale and purchase of cannabis produce at the new RGI facility.

Thanks to the SPA, RGI is a unique ‘triple threat’ when compared to market peers. This is a particularly advantageous development for the company, with key analysts already flagging the potential for a huge supply gap now that cannabis is fully legal in Canada.

Both RGI and VGW will collaborate on an offtake agreement for the sale and purchase of cannabis produce at the new RGI facility.

While over 100 legal cannabis outlets have opened in Canada, a recent report by the C.D. Howe Institute projects that current suppliers will meet just 30-60% of the nationwide demand (610 tonnes).

Anindya Sen, who is an economics professor at the University of Waterloo, has made a similar claim, “There will not be enough legal supply, especially during the first half of the year following legalisation, primarily because of the slow rate of licensing producers.”

The total Canadian cannabis market will generate approximately $7.17 billion in total sales in 2019 (according to Deloitte report). Of this figure, some $4.34 billion is expected via lawful cannabis sales in the first year of legalisation alone.

With all this activity in the space, the market capitalisation of cannabis-focussed companies has increased significantly. Tilray, Canopy Growth Corp. and Aurora Cannabis Inc. have all crossed the $10 billion threshold in market capitalisation. While shares in Canopy Growth Corporation (TSX:WEED | NYSE:CGC) gained more than 30% after a C$5 billion investment by alcoholic beverage giant Constellation Brands (NYSE: STZ).

There has been some encouraging M&A activity with the following acquisitions recently completed: Aurora purchased Anandia Laboratories Inc. for C$115 million in June 2018; Nuuvera purchased ARA-Avanti Rx Analytics Inc. for $43 million in February 2018; and Wheaton purchased Dosecann LD Inc. for $38 million in April 2018.

With that in mind, RGI looks set to leverage its expanded capability at an opportune moment.

“We are very pleased with the execution of the SPA, the contemplated transaction, and becoming a shareholder of RotoGro,” Valens CEO Tyler Robson said.

“The acquisition of Supra THC is a massive step forward in the Company’s strategic growth plan to establish itself as a global leader in the cultivation of cannabis and perishable foods,” RGI Managing Director Michael Carli said.

“In addition to initiating a dialogue with Health Canada, we have identified premises where we wish to establish our cannabis operations and the design of layouts for these premises has already begun.

“We have an excellent working relationship with the management team at Valens. We look forward to our future business collaboration for offtake agreements and downstream value-added products and services,” Carli added.

About Supra THC:

Supra THC is a wholly-owned subsidiary of Valens which specialises the processing of cannabis into pure extracts and oils.

Supra THC operates pursuant to Dealer’s Licence No. 2018/6955 issued by Health Canada, and is permitted to possess cannabis and its related active ingredients.

The company has performed the following revenue-generating activities:

• Leading-edge scientific research and development of products related to medicinal cannabis industry
• Supply of sustained excellent product line
• Toll processing or licences producers

Of particularly interest is Supra’s operation under accreditation using cannabis as the basis for doing so, making it the first Canadian Dealer’s License (ISO/IEC 17025) to be awarded under such terms.

The ISO 17025 accreditation has become the international standard for testing laboratories demonstrating their competency and ability to deliver reliable results.

RGI will apply for an amendment to the license to permit Standard Cultivation.

The total consideration is C$11 million paid over four instalments, with 80% to be paid in RGI shares and the remaining 20% in cash. RGI will pay 10% upon signing the SPA, with a further 10% at ownership.

The company will then pay a further 30% on award of the Processing License and the final 50% on award of the Cultivation License. Considering that RGI stock will facilitate a large proportion of payment, this is an exceptional deal for the company.

Further details regarding the transaction are available in the company’s announcement on the ASX.