Canopy Growth Hiku Brands Merger is Telling

By acquiring Hiku Brands, Canopy Growth Corporation (TSX:WEED) will be able to leverage a combined portfolio of established brands and further the vertical integration of its operations

SmallCapPower | July 12, 2018: Canopy Growth Corporation (TSX:WEED, NYSE:CGC) late Tuesday announced that it has reached an agreement with Hiku Brands Company Ltd. (CSE:HIKU) to acquire the Company in an all-stock transaction. Canopy Growth will pay shareholders of Hiku Brands a 33% premium to Hiku’s 20-day VWAP as of July 9, 2018. This works out to 0.046 Canopy Growth shares for each common share of Hiku, or $1.91/share.

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Hiku Brands previously entered into an agreement in April 2018 to acquire WeedMD for $240M. Since the acquisition has been terminated, Hiku must pay WeedMD a $10M break fee. Canopy Growth has agreed to cover the cost of the penalty for Hiku by way of promissory note.

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Hiku Brands is the owner of Tokyo Smoke, which features upscale retail locations selling a collection of smoking accessories in a high-end coffee shop environment. Hiku also owns Van der Pop, a female-focused cannabis brand that allows women to explore cannabis and how it relates to self-care, health, wellness and socialization.

Since going public less than a year ago, shares of Hiku Brands have soared more than 130% to its current price of $1.77

By acquiring Hiku Brands, Canopy Growth will be able to leverage a combined portfolio of established brands and further the vertical integration of its operations. Canopy Growth will benefit from Hiku’s expertise in retail and marketing, allowing it to target multiple demographics and segments. Canopy Growth has also committed to providing capital to fund Hiku’s growing operations ahead of the Canadian recreational market opening.

That being said, with oversupply concerns once recreational cannabis consumption becomes legal in Canada on October 17, 2018, larger Canadian cannabis producers, such as Canopy Growth, will likely continue to use their inflated stock values as currency for future growth.

Hiku Brands and WeedMD shares had a mirrored reaction Wednesday, with shares of HIKU surging 20% and WeedMD stock falling 16%.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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