SECTOR VIEW


“The future legal situation will be one of the most influential factors in cannabis M&A activity.”

“In traditional product markets, brand equity is extremely valuable and probably the most interesting part of the value chain. However, in the cannabis industry it’s really difficult to create brand equity atan international level, because regulations between countries and states still differ substantially.”

By Afzal Hasan, President and General Counsel at Origin House

After the foundation of CannaRoyalty (the former name of Origin House) in 2014, the company developed into a leading North American cannabis products and brands company. A significant part of Origin House’s growth originates from acquisitions. In 2018/2019 alone, six companies were bought. In April 2019, Origin House received an acquisition offer from the US-based cannabis company Cresco Labs, which is considered to be the largest-ever public company acquisition in the US cannabis sector. We spoke to Afzal Hasan, who has been responsible for several of Origin House’s acquisitions.

How important has M&A been for Origin House?

In the past years, acquisitions were core strategy for us. The six acquisitions we did in the past two years brought us size and growth, which are a key differentiators in the cannabis market.

Being on top of the league tables boosted Origin House’s relationships with consumers, strategic partners, regulatory institutions and investors. In April 2019, Origin House received an

acquisition offer from Cresco Labs, a listed US-based grower, processor, and retailer of premium cannabis operating across the US. Although the transaction has not officially been closed yet, it is considered to be the largest-ever public company acquisition in the US cannabis sector. It is a highly synergetic business combination. For example, Cresco Labs is active in different states than Origin House. Cresco Labs mainly focuses on the cultivation and retail segment of medical cannabis, while Origin House is mainly involved in the distribution segment of recreational cannabis. The vertical integration will lead to a more diversified and larger company, which enhances distribution power and increases access to resources. Furthermore, it would take Cresco many years to obtain the market position Origin House has, so it tremendously

accelerates their growth path.


What is your view on the current M&A and valuation dynamics in the cannabis industry?

The market currently seems to be dominated by irrationality since there is a core misunderstanding of where economic surplus will be generated in the cannabis market. Companies and investors tend to be over ambitious. For example in terms of revenue

expectations. Also, they often lack the ability to critically analyze their businesses and the underlying market. This is a very comparable as what happened during the dotcom bubble,

where irrationality was fueling extreme expectations and valuations. One can not necessarily assume that M&A transactions in the short to medium term would be done with more intelligence. There is still plenty of room for wrong acquisitions and it is wrong to assume that the current price rationalization of publicly listed cannabis companies will immediately improve

the quality of M&A in the industry. But in the end, I expect that M&A activity and valuations will revert back to normal levels when the rationalization is finished.


Which segment of the value chain do you expect to become most attractive?

The future legal situation will be one of the most influential factor in cannabis M&A activity. At the moment it is very difficult to say which part or parts of the value chain will benefit the most from these current market developments. In traditional product markets, brand equity is extremely valuable and probably the most interesting part of to value chain. However, in the cannabis industry it is very difficult to create brand equity at an international level, because regulations between countries and states still differ substantially. The ongoing international

legalization will therefore be a key factor to determine which segment will become most attractive. Until the number of countries and states where cannabis is legalized remains limited, it is more likely that cannabis companies remain being focused on vertical integration.


What are your expectations of the cannabis industry going forward?

In the long term, I expect that more experienced and large CPG companies will play a more active role in the cannabis industry. This will likely happen in conjunction with the maturation

of cannabis markets from the highly regulated and convoluted state they are in today, into value chains that function more like traditional CPG markets. A logical entry point for traditional CPG

companies to enter the market will be by acquiring an existing cannabis company instead of starting a business from scratch

ABOUT AFZAL HASAN

Afzal Hasan started his

professional career in 2012 as a lawyer in the Securities Group at Cassels Brock & Blackwell. As a lawyer, he has been involved in various transactions, including corporate financings, private placements and mergers and acquisitions. In 2017, Afzal decided to join Origin House.

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