Canopy Growth Corp Makes Another Curious Hemp Acquisition

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Move of Canopy Growth Corporation (TSE:WEED) deeper into the hemp space could be in response to Aurora Cannabis (TSE:ACB) taking an ownership stake in Hempco Food and Fiber

SmallCapPower | November 30, 2017: Canopy Growth Corporation (TSX:WEED) announced Monday that it has entered into a definitive agreement to acquire certain assets and intellectual property from Green Hemp Industries Ltd. and its principal, Jason Green. The move further strengthens Canopy’s hemp operations and comes a week after Health Canada announced plans to reverse the rule that currently prohibits hemp flower to be used for extracting cannabidiol. Specifically, Green Hemp’s proprietary process to extract whole hemp plant at field-scale will enhance Canopy’s vertically integrated field-scale hemp production capabilities.

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Following the acquisition, Canopy Growth will operate ~300 acres of existing hemp production and plans to expand it 2,200 acres for the 2018 growing season. Once the proposed favourable hemp regulations come into force, material collected at Green Hemp could be processed for cannabinoid extraction at the Tweed Grasslands facility in Saskatchewan, increasing the amount of CBD that can be used by Canopy Growth for expanding its lineup of cannabinoid-based products. Upon completion of the deal, Canopy will reimburse Green for crop input expenses, issue 24,576 common shares, and appoint Jason Green, who currently serves as a director of the Canadian Hemp Trade Alliance, as Head of Agriculture under Canopy’s hemp division.

Bruce Linton, Chairman and CEO of Canopy Growth, commented “Green has developed an optimized process to grow, harvest, collect, and extract the whole hemp plant at field-scale and in a fashion that meets a high standard for product quality. We look forward to rapidly scaling this operation so that, in combination with our existing hemp assets, we capitalize on the new opportunities outlined in the government’s proposed regulatory framework.”

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Canopy Growth, Canada’s largest cannabis producer with current production capacity of nearly 40,000 kgs per annum, continues to focus on product diversification as a key strategy to improve the Company’s profit margins by vertically integrating up the value chain towards products that treat cannabis and cannabinoids as ingredients rather than the base product. As part of this strategy, Canopy Growth entered the hemp business in November 2016 with the acquisition of Groupe Hemp, a firm licensed to cultivate hemp and extract oil from hemp seeds. In January 2017, Canopy Growth acquired hemp-based foods maker, Mettrum Health Corp. In September 2017, the Company signed a definitive license agreement with Skinvisible, which will develop topical hemp-based products that will be launched by Canopy Hemp Corporation in Canada.

This most-recent move of Canopy Growth deeper into the hemp space could be in response to Aurora Cannabis (TSX:ACB) recently taking an ownership stake in Hempco Food and Fiber (TSXV:HEMP). The industry is hoping that regulations will change with recreational legalization, lifting the current prohibition of the extraction of cannabidiol from hemp products.

Canopy Growth is the most highly-valued cannabis company in Canada with a market capitalization of $3.6 billion, 74.0x its TTM sales of ~$49 million.

Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in any of the companies mentioned above.

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