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Sep 14, 2018

Tragically Hip-backed pot producer Newstrike eyeing sale: Sources

Newstrike says focus is on legalization rollout amid report they're exploring a sale


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Newstrike Brands Ltd., the cannabis producer partly owned by The Tragically Hip, is exploring a sale and has approached several other marijuana companies about a possible tie-up, a sign the crowded Canadian pot sector is set to begin a fresh round of consolidation, people directly familiar with the situation told BNN Bloomberg.

Toronto-based Newstrike (HIP.V), the parent company of Up Cannabis Inc., which has developed recreational cannabis strains inspired by The Tragically Hip’s song titles, has reached out to at least four cannabis companies in the past month, the sources said. There are no assurances the discussions will result in a deal and the sources declined to be identified because the ongoing discussions are private.

Newstrike could merge its Up Cannabis brand with another company that is also developing recreational cannabis products that are closely tied to rock musicians if an outright sale does not happen, one of the sources with direct knowledge said.

“There’s something in the works. I wouldn’t be surprised if a deal gets made in terms of their acquisition but it could also fall sideways,” one of the sources said.

This wouldn’t be Newstrike’s first foray into mergers and acquisitions. The company’s proposed sale to CanniMed Therapeutics Inc. fell through last year after Aurora Cannabis Inc. swept in to buy the Saskatoon-based producer for $1.1 billion.

“Some of the smaller players will have challenges to get significant funding and get meaningful shelf space,” said Martin Landry, managing director of equity research at GMP Securities LP, in an interview with BNN Bloomberg. “Smaller guys will probably have difficulty generating meaningful profitability. Scale is going to become very important and we’re starting to see some serious expertise entering the space.”

“As a general policy, Newstrike does not publicly comment on rumours or speculation in the marketplace or any potential transaction unless, and until, a binding legal agreement to effect that transaction has been signed,” said PM Rendon, the company’s spokesman, in an emailed statement to BNN Bloomberg.

“We have a strong cash balance of approximately $125 million at the end of June, and we will continue to take an active role in industry discussions regarding mergers and acquisitions, partnerships, joint ventures and licensing agreements to build out our product offering and maximize value for our shareholders.”

Shares in Newstrike fell 2.6 per cent to 75 cents when markets opened Friday amid a broader sector selloff, after Politico reported that Canadians who invest in marijuana stocks could possibly face bans from entering the U.S.

Newstrike has signed distribution deals with five provinces and has current production capacity of 12,500 kilograms which is expected to double by early 2019. Newstrike reported a loss of $8.6 million at the end of the second quarter and has yet to report any revenue since it completed a reverse takeover in June 2017. Newstrike had a market capitalization of about $426 million as of Thursday's close. 

With over 100 producers licensed to produce cannabis in Canada and hundreds more in the pipeline, industry executives also believe that the sector is rife for significant consolidation in the coming months.

“Over the next six months, you’re going to see as many as 12 companies enter into shotgun marriages as a result of frustration, desperation or a strategic advantage,” said Vic Neufeld, chief executive of Aphria Inc. (APH.TO), in a conversation with BNN Bloomberg. He added he hasn’t been approached by Newstrike to acquire the company.

On Thursday, Newstrike chief executive Jay Wilgar issued a press release that extolled the company’s “realistic and humble” strategy ahead of the legalization of recreational cannabis next month.

“It seems to us, while many in our emerging industry are aspiring towards some form of global domination set against a backdrop of aspirational but likely unattainable goals, we have a far more realistic and humble approach with a focused strategy to achieve value for our shareholders,” Wilgar said in the release.

He added that the company is exploring “several opportunities” as it eyes long-term opportunities in the sector, including cannabis concentrates, vape pens, edibles and beverages.

“Newstrike is in a strong position to take an active role in the evolution of our industry as we look to mergers and acquisitions, partnerships, joint ventures and licensing agreements to build out our offering,” Wilgar said.

Members of The Tragically Hip invested in Newstrike and control a minority stake in the company. Wilgar described the band as a “critical part” of the company. Indeed, five strains of its marijuana have been named after classic Hip tunes.

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.