Aleafia Health Inc. (ALEF.V) is acquiring Emblem Corp. (EMC.V) in an all-stock deal worth $173 million, a deal that marks the first significant cannabis industry takeover since Canada legalized recreational pot in October. 

​The deal will combine two mid-tier cannabis producers into a significant player in the medical marijuana space while providing Aleafia with an entry into the nascent recreational cannabis market that Emblem already operates in. 

"There were other players out there in the market but some were more recreationally-focused or they weren't known for taking care of their patients," said Benjamin Ferdinand, chief financial officer at Concord, Ont.-based Aleafia, in a phone interview with BNN Bloomberg. 

"On that basis, the ones that did fit were larger and in our view, we needed to consolidate to get there. With that said, Emblem was a natural fit." 

Since Canada legalized recreational sales of cannabis in October, analysts speculated that the industry was ripe for consolidation in the coming months.

Meanwhile, the bloom appears to be coming off the Canadian cannabis flower story amid an industry-wide supply shortage and disappointing earnings. Against that backdrop, the Horizons Marijuana Life Sciences Index ETF has lost approximately 36 per cent of its value since the day Canada legalized pot. In that same period, Aleafia shares are down about 57 per cent, while Paris, Ont.-based Emblem declined 39 per cent. 

That spurred a move for Aleafia to seek out a similar sized company that could complement its growing medical marijuana business while ensuring access to the recreational cannabis market, Ferdinand said. 

Under the terms of the agreement announced on Wednesday, each Emblem share will be exchanged for 0.8377 of an Aleafia share. When the deal closes, Aleafia’s shareholders will own 59.0% of the combined entity, with the remainder owned by Emblem’s shareholders. The transaction is subject to standard approvals, including a vote by Emblem shareholders, which is expected to occur at a special meeting before March 8.

The deal gives Aleafia access to Emblem’s provincial supply agreements with Ontario, Saskatchewan, British Columbia and Alberta, as well as its national medical distribution through Shoppers Drug Mart and a joint venture with Germany-based Acnos Pharma GmbH in the world's biggest medical marijuana market. 

The combined company will be able to produce 138,000 kg of cannabis by the middle of 2019, nearly half of which will be sourced from Aleafia's outdoor grow facility in Port Perry, Ont. It will also ensure a reliable supply of medical, high-margin product to a base of about 60,000 patients and prevent churn to other producers, Ferdinand said. 

"Our core focus is around patients and dominating the health and wellness space globally," he said. 

Ferdinand added the company will continue to look for additional acquisitions after it completes its deal with Emblem.

"This is only the first step and we'll continue to scale," he said.

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