HIKU Brands (HIKU.C) and WeedMD (WMD.V) to merge, creating vertical integration beast

If there’s been a knock on HIKU Brands (HIKU.C), nee DOJA, by the critics over the last year, it’s been that they don’t grow enough actual weed. Sure, they’ve nailed the branding side and they did a big deal to grab the most recognizable retail brand in Canada in Tokyo Smoke, and they have retail distribution okays in Manitoba and will likely get similar deals elsewhere, and they know how to deal with liquor boards by virtue of the founders’ family vineyard.

But their valuation, which has at times hit as much as $600m during the early year weed frenzy, only to settle down to today’s open at $245m, has, for some time, seemed elevated to some.

Not anymore.

The Transaction will be carried out by way of a plan of arrangement of WeedMD under the Business Corporations Act (Ontario), pursuant to which WeedMD shareholders will receive 1.4185 Hiku common shares (each, a “Hiku Share“) in exchange (the “Exchange Ratio“) for each WeedMD common share (a “WeedMD Share“), representing the equivalent of C$2.52 per WeedMD Share and a premium of 60% based on the closing prices of Hiku Shares on the Canadian Stock Exchange (“CSE”) and the WeedMD Shares on the TSX-V on April 18, 2018, and a premium of 79% based on the 20-day volume-weighted-average-price (“VWAP“) of the Hiku Shares on the CSE and WeedMD Shares on the TSX-V as of April 18, 2018. In addition, each outstanding option and warrant to purchase a WeedMD Share will be exchanged for an option or warrant, as applicable, to purchase a Hiku Share, based upon the Exchange Ratio.

The deal combines the two units with a slight majority to HIKU (51.75% to 48.25%).

The combination of Hiku and WeedMD creates a premium cannabis brand house with fully vertically integrated operations, an expanding network of retail stores, a growing medical business, and four scalable cannabis production facilities, two of which are currently licensed.

This addition brings HIKU to exactly where it needs to be to be a competitive player with the big boys. Investors had given it a high valuation based on its retail strategy, which I tend to think will be worth a lot more in the long haul than farming, but having a fully functioning, sizable array of places to grow your own product is an important part of locking down your retail supply chain.

As a result of the transaction, Hiku will operate a diverse cannabis supply chain that includes a large portfolio of unique genetics for its growing brand portfolio and emerging nationwide retail sales channels. The entity combines Hiku’s strength in retail and branding — ensuring a high-quality, consistent and educational consumer experience in the adult-use cannabis market — with WeedMD’s existing service and quality in the medical market.

HIKU’s grow footprint is small but expanding. WeedMD’s is larger and ditto.

WeedMD operates a 26,000-square-foot indoor facility with over 1,500 kilograms of current production capacity and is fully financed for a large-scale production expansion of a 14-acre greenhouse on a 98-acre property representing an increase to more than 50,000 kg of capacity. The combined companies create a brand-focused retail business with the ability to provide product quality and selection on par with the retail experience itself.

That 26k square feet is around half the size of Aurora’s (ACB.T) 55k sq ft operation in Alberta and Hydropothecary’s (THCX.V) 42k, and the expansion proposed will take them to 430k sq. ft which is more than Supreme Cannabis (FIRE.V), Emblem (EMC.V), and ABCann (ABCN.V).

Though substantially less than Emerald Health (EMH.V), which we think is spinning bullshit.

Now comes the good part: The deal allows both parties to receive competing offers for the next five business days, and provides both parties the ability to match any offer that should show up in that time.

What WeedMD has is not unique, and others could bring that larger grow space HIKU’s way quite happily.

What HIKU has is quite unique, and may be something a lot of suitors would be into.

In the last year, Aurora in particular has thrown around much coin and at high premiums to bring in pieces they see as complimentary. If the next five days pass without anyone else chiming in, shareholders should absolutely vote in favour of the arrangement, which both Eight Capital and BMO have judged as ‘fair.’

Conference Call Information

A conference call on the Transaction will be held on Friday, April 20, 2018 beginning at 10:00AM EST. Participants are asked to use the following information:

— Chris Parry

FULL DISCLOSURE: HIKU is an Equity.Guru marketing client