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Jan 7, 2019

Origin House shareholders aim to shield against hostile takeovers as pot M&A heats up

Origin House shareholders look to shield against hostile takeover offers

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A group of shareholders representing one-quarter of Origin House agreed to enter an agreement that protects the cannabis company from hostile takeover offers amid a recent uptick in M&A activity in the sector. 

Origin House Chief Executive Officer Marc Lustig said 26 per cent of the company's shareholders have entered a "voluntary voting support agreement" after receiving unsolicited offers from several unnamed cannabis companies. The agreement is meant to protect Origin House from "hostile consolidation transactions with companies using their stock as currency," Lustig said in a release Monday.  

"We are seeking to protect the Company from opportunistic paper bids designed on taking advantage of shareholders by offering short-term gain while depriving them of the more significant potential long-term value that we are building," Lustig added.

Canadian cannabis M&A activity began heating up just two months after recreational pot use was legalized in the country. Columbus, Ohio-based Green Growth Brands Ltd. said in December it plans to launch a $2.8-billion takeover bid for Aphria Inc. despite being spurned from initial advances to acquire the company. Meanwhile, Aleafia Health Inc. announced two weeks prior it would acquire Emblem Corp. in a friendly all-stock deal worth $173 million. 

Origin House, the trade name of CannaRoyalty Corp. (OH.CD), distributes more than 130 brands that mostly sell into California, the world's biggest legal cannabis market, as well as placed an offer to buy a vape shop chain with 15 outlets in Ontario. 

The company had a market capitalization of about $416 million as of Friday's close on the Canadian Securities Exchange. 

Despite reporting just $6.6 million in its most recent fiscal quarter, Origin House's product penetration in California was highlighted by Beacon Securities in a report released in November as key to building "a growth trajectory that will last several years."

Lustig said he would consider "bona fide" acquisition offers that properly account for the long-term value in the company. 

"To be clear, the support agreements are intended to protect shareholders from coercive or opportunistic bids only," he said. 

U.S. cannabis companies raised $1.5 billion on the CSE during the first 10 months of last year, outpacing their Canadian counterparts amid a greater focus from investors in the U.S. market, believed to be worth north of $65 billion, according to Scotia Capital.

U.S. and Canadian pot companies raised more than US$13.9 billion in equity and debt in 2018, nearly four times what was raised the year prior, according to Viridian Capital Advisors. 

John Downs, director of business development at The Arcview Group, a U.S.-based cannabis consultancy, told BNN Bloomberg in a phone interview pot companies are racing to take advantage of a strong balance sheet to scale up, especially in jurisdictions they have yet to operate in. 

"The 'build versus buy' question is being asked in boardrooms everywhere," Downs said.

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.