While Canadian cannabis giants like Canopy Growth, Corp. (TSX: WEED) continue to scale back domestic and international production, veteran vegetable grower Village Farms International, Inc. (Nasdaq: VFF) is making moves to become a new industry leader.
On Tuesday Village Farms said it was taking full ownership of Pure Sunfarms, Corp., buying out Emerald Health Therapeutics, Inc.‘s (TSX-V: EMH) previous 41.3 per cent stake for $79.9 million.
Late last month Raymond James analysts predicted the takeover while saying Village Farms could soon control 20 per cent of Canada’s market share with the move. Analysts also predicted a 100 per cent takeover could push share prices up to US$27.
But on Tuesday Village Farms’ shares increased modestly to US$5.73, around the same price they were when analysts fist predicted the takeover almost two weeks ago.
In the inked agreement, Emerald Health will sell its 36.9 million common shares in Pure Sunfarms to Village Farms for an upfront cash payment of $60 million, with an additional $19.9 million due six months after the transaction date — scheduled for late October 2020.
It’s not a move celebrated by everyone. On Twitter, cannabis stock tipster Betting Bruiser criticized the companies for going through a lengthy ownership arbitration in the spring of this year, just to settle like this several months later.
After all the bickering and lawyers fees. In the end $VFF ends up buying $EMH stake in @Puresunfarms … I think it’s a lose lose situation for both. $VFF buys a dwindling assets and $EMH gets cash to stay afloat. #PotStocks
— Betting Bruiser (@BettingBruiser) September 8, 2020
Full ownership means Village Farms will be able to fully leverage its decades of successful greenhouse management to meet its cannabis and CBD ambitions in North America and internationally, CEO Michael DeGiglio said in a statement.
“As the low-cost greenhouse cannabis producer in Canada, Pure Sunfarms has generated seven consecutive quarters of positive [earnings before interest, taxes, depreciation and amortization] and six consecutive quarters of net income,” he said. “And with high-quality products that consumers want at an affordable price, [Pure Sunfarms] remains the leading dried flower brand with the OCS since launching its branded retail products.”
Pure Sunfarms’ industry-leading all-in cost of production is one of the reasons Raymond James analysts peg the company for being a potential giant. According to an August note, Pure Sunfarms pumps out weed for $0.84 per gram, followed up Organigram Holdings, Inc. (TSX: OGI) at $0.98 per gram, and then by Aphria, Inc. (TSX: APHA) at $1.69 per gram.
For the six-month period ended June 30, 2020, Pure Sunfarms reported total net sales of $30.9 million with EBITDA of $9.2 million. That’s in part thanks to its popularity in Ontario, where the company says it’s the top selling brand of dried flower at the Ontario Cannabis Store with a 13.4 per cent market share, per kilogram sold.
Another reason Raymond James picked Village Farms as a potential industry leader was because of the company’s potential for expansion.
Pure Sunfarms cannabis is currently grown in two greenhouses in Delta, British Columbia, which make up 2.2 million square feet of cultivation space. That cultivation space could more than double if Village Farms decides to convert its third wholly owned greenhouse, the 2.6 million square foot Delta 1 facility, to grow cannabis. Pure Sunfarms previously had until Sept. 28, 2021, to decide if it wanted to convert the Delta 1 facility. It’s not clear if that date could change after Village Farms takes complete ownership.
Following the transaction, the agreement between Village Farms and Emerald Health will end and all Pure Sunfarms employees will work for Village Farms. This should happen just after Village Farms puts out its financial results for the fiscal period ended Sept. 30, so that report will only reflect Village Farms’ current 58.3 per cent ownership in Pure Sunfarms, noted the company.
Top image via Village Farms