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.