SmallCapPower | January 16, 2018: Aphria Inc. (TSX:APH), a leading Canadian marijuana producer, has signed an agreement to acquire 100% of Broken Coast Cannabis Inc., a premium cannabis producer located in British Columbia for $230 million in stock and cash. The deal will add incremental annual production of 10,500 kgs, with some of that cannabis being market ready today. This addition will boost Aphria's forecast annual production to 230,000 kgs. The transaction also gives Aphria more geographic diversification, a cross-Canada distribution platform, and access to over 40,000 medical patients. Aphria's share price surged 20% to reach $21.70 post the announcement on Monday.
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The deal is valued at $230 million, out of which Aphria will pay $10 million in cash and the remainder in stock. Shares issued to Broken Coast shareholders will be issued at a price of C$15.09 and the deal is expected to close by January 31, 2018. Each of the three co-founders of Broken Coast, who cumulatively hold over 80% of the outstanding capital, will remain with the pro-forma company.
Broken Coast operates an indoor cannabis production facility on Vancouver Island that it is expanding. As part of the transaction, Aphria has approved a further expansion project that is expected to increase the facility’s annual capacity to 10,500 kilograms per year. On the financial side, Broken Coast has had positive adjusted EBITDA since 2015 and its operations are highly complementary to Aphria. In combination with Aphria's track record, the combined entity is expected to be amongst the most profitable and sustainable producers in the country.
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Additionally, Aphria also announced a supply agreement with Australian-based Althea and has invested $2.5 million in Althea in exchange for 25% stake. This investment increases Aphria's presence in the emerging Australian cannabis market. Aphria will provide Althea with packaged co-branded cannabis oil and dried flower products for the Australian medical cannabis market. Althea has already received import permits from the Australian Government's Office of Drug Control (ODC) and Aphria is expected to export the first shipment this month, subject to regulatory approvals by Health Canada.
Aphria shares have more than tripled in the past three months and currently are trading at a forward P/E ratio of 74.83x.
Aphria’s acquisition of Broken Coast is yet another indication of a consolidation movement in the Canadian cannabis sector. Going forward, M&A in the cannabis sector will accelerate as companies ramp up production ahead of recreational sales of pot becoming legal in Canada this summer.
Disclosure: Neither the author nor his/her family own shares in the company mentioned above.
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