By Luis Merchan, President and CEO of Flora Growth Corp. (NASDAQ:FLGC)
In the cannabis industry, mergers and acquisitions are crucial — but executing on an acquisition can be like dancing along a razor’s edge.
Early on, the entrepreneurs that helped set up the first days of the industry were frequently cannabis people, not business people. For nearly a century, the industry was largely forced to operate in the Black Market because of the federal prohibition. In fact, the total US illicit cannabis market reached an estimated $66 billion in 2019.
The cannabis industry is now transitioning into a more legitimate business, which completely changes the landscape for human capital or the company’s talent. This transition has resulted in organizations now being led by executives who have the know-how to run a business, with a small portion of those executives knowing the ins and outs of the cannabis industry — instead of just being good at raising capital.
All of these rapid developments in the cannabis space and constant regulatory updates have created a dichotomy in the industry. This has required successful industry leaders to completely rethink their M&A strategies — and the smartest are carefully focusing on the human capital aspect of mergers and acquisitions.
In the competitive landscape of the cannabis industry today, a few companies are growing sustainably, while many of the perceived early “industry titans” are shrinking because of poor M&A and capital allocation decisions. As companies shrink or downsize elements of their business, typically it is their very best people who are walking out of those jobs. A lot of the free agents that are willing to leave their current positions for a new organization are doing so because they’re recognizing the challenges on the human capital side are far greater once a company has overbuilt and is trying to rightsize again.
This environment creates opportunities for savvy new companies who are starting fresh to recruit talent, where it is often the smaller (right) size of their organization that allows them to attract top talent. This is because the best people properly value the opportunity for growth and believe they can positively influence the trajectory of the company in a meaningful way.
While navigating the very competitive cannabis M&A landscape, it is important for successful business leaders to realize that with an acquisition, you’re not just buying revenue or distribution from a company — you’re buying a skill set, a culture, and a group of people that can help enhance a rapidly growing organization if managed properly.
Successful M&A strategy is not just about adding revenue streams and new outlets for distribution — a successful acquisition most importantly adds talent that can compliment the skill set of the current team driving the existing business.
Human Capital and M&A: Hoshi International
The Hoshi International executive team is one of the most experienced “build and exit” groups in the cannabis industry, and an excellent example of acquiring human capital. A lot of the Hoshi team’s experience comes from Mettrum, which was one of the first licensees to sell to Canopy Growth (NASDAQ:CGC) for $500 million.
After that exit, a portion of the Hoshi team-built Fire and Flower (NASDAQ:FFLWF), which is the number one cannabis retailer across Canada, and by effect the world’s largest cannabis retailer. Fire and Flower was also the first retail chain to get backing from traditional retail groups when Alimentation Couche-Tard, one of the largest convenience stores brands globally, invested in the company for a 20 percent stake in them. Simply put: this team’s ability to build and operate fundamentally sound businesses is second to none.
Flora Growth Corp. (NASDAQ:FLGC) recently took a similar minority stake of up to 15 percent in Hoshi, which offers access to two major assets: one of them in Portugal and the other in Malta — both of which are major gateways into Europe. This allows Flora to move its cannabis flower, derivatives and other products into those markets, where they can be processed through either of those two facilities and receive EU-GMP.
So those two assets really allow Flora to access the entire medical market in all of Europe, and under the agreement we also get to dictate how our product moves into and throughout the EU. By anchoring ourselves to Hoshi, we have obtained preferred rights. When they are looking to purchase new flower, the Hoshi team looks to their strategic partners. Through this partnership we are also working on building new distribution points and branding opportunities throughout Europe.
As opposed to traditional means, where you would buy the business straight out, we’re recognizing that with a smaller strategic investment and business plan alignment with Hoshi, we get the benefit of that infrastructure. We also have a near-term potential liquidity event in sight, a strategic partner that we’re helping build out, as well as a team with all of the key relationships such as Alimentation Couche-Tard, Fire and Flower and the other major players in the US, Canada and Europe.
Specifically, in terms of executive leadership in the partnership, we obtain access to: John Aird, who was a major management consultant for Aphria, and currently Chairman of Olli Brands; Michael Haines, who helped build Mettrum up to its successful exit to Canopy Growth, which catapulted Canopy into the world’s largest cannabis company; David Fowler their VP of Operations, who came from a major global infrastructure company; Trevor Fencott, who is on their advisory board and remains the CEO of Fire and Flower; Harvey Shapiro, the former Chairman of Emblem Corp and Fire & Flower; and Emily Moeller, who was the director of cultivation at Bedrocan. This group knows how to create value for their shareholders and partners, as well as how to distribute product globally.
Heimat – Acquiring the Premier Innovator in Hemp Smokeables
Heimat sells into over 2,500 points of distribution throughout Switzerland, pretty much every grocery store and convenience store across the country. This is a perfect example of existing and traditional CPG, where a product such as a hemp-tobacco cigarette that’s pretty much allowed to be sold across the country, has already established access points everywhere that you’d want to have one for a CBD-related product.
In this deal, you also have one of the leading technologies in hemp pre-roll manufacturing, through their patented technology. The patent goes around their ability to convert what is called an MK-9, which is the standard in tobacco pre-roll manufacturing, into a hemp cigarette manufacturing device. What Heimat did is they created a device that inserts itself in between the system and basically corrects for a big resin problem in making any cannabis-related pre-roll as opposed to tobacco.
The main difference is that cannabis has a large amount of oil and resin that comes off of the product, so resin tends to build up in the machine as it continues to run and it eventually jams and stalls. Heimat’s technology removes that jam, and actually allows you to put out a large quantity of hemp cigarettes that are hemp rolls without having to spend hours and hours cleaning the machines. No one in Canada is competing with the prices accomplished here.
The tobacco market is a $700-800 billion market, if you can cannibalize even one tenth of it, you have a $70-80 billion market with hemp/tobacco pre-rolls. So this is a completely different market outside of cannabis, you are now going after big tobacco. Obviously, we all know about the size of that market, and this type of product could be sold anywhere.
Vessel – Super-Powering a Global E-Commerce Strategy
Vessel is a company that creates luxury products including high-end vape pen batteries, dry-herb devices and cannabis accessories. The hardware market has greater customer loyalty, access to a large multi-state operator network, and does not conflict with Nasdaq’s rules around distribution of THC products. However, beyond Vessel’s exceptional product, is an even more impressive operating team with one of the best branding and e-commerce skillsets in the industry.
With a team that successfully grew a revenue stream over 100 percent in 2020, and targeting another 100 percent in 2021, the Vessel team will represent a substantive addition to Flora Growth’s human capital assets.
Moving forward, Flora will leverage Vessel’s in-house design, sales and marketing expertise to enhance Flora’s existing global brand and product portfolio. As part of this process, the team will develop a strategic plan to maximize consumer experience and resonance, increase market share and positioning, and re-invigorate the Flora brand portfolio for the global consumer, while staying true to its roots and values, in order to make every consumer experience more expressive and personal. We are excited to have the Vessel team join us and help build a greater global e-commerce strategy across our brands.
The M&A Endgame
Successful cannabis industry entrepreneurs have to approach their M&A strategy as: our company is going to take on the top talent from all over the world. 2021 is the year of savvy cannabis M&A, and there is an opportunity to buy revenue at decent multiples. Meanwhile, initiatives looking at these needs must include a synergy with human capital and business strategy — picking up human capital in the right spots.
The cannabis industry leaders that win will be able to say that they spent capital better than anyone else across the industry. What will that mean? That they invested in people, culture and ideas — the true drivers of this industry — and built the largest human capital network.