Emblem signed a non-binding LOI to acquire the remaining ownership interest in Natura Naturals for $25 million in cash, $12.5 million in mortgage financing and 26,102,941 common shares. The deal has an implied transaction value of $76 million (inclusive of Natura shares already owned by Emblem). On completion of the deal, Emblem will further its aggressive approach to sales growth both domestically and internationally backed by robust supply from the Natura greenhouse. The announcement comes shortly after Emblem announced a $3 million equity investment in Natura and the entering into of a 3,000 kg per year supply agreement.

Natura operates a 662,000 sq. ft. licensed greenhouse that is currently undergoing a phased conversion and retrofit that is expected to bring up to 15,000 kg of annualized cannabis production online in 2018. Once completed in 2019, the facility is expected to bring total annualized cannabis production capacity to approximately 70,000 kg per year.

In light of the transaction, Emblem has made the decision to suspend greenhouse construction plans at their Paris Road location. The construction of Emblem’s GMP certified lab located at their Woodslee location will continue with an anticipated completion date of December 2018.

Cannabis IndustryWith more than 40 years of greenhouse production expertise, Natura will bring a wealth of expertise and talent to Emblem’s production side, with the capacity to produce high-quality, greenhouse-grown cannabis at a lower cost than an indoor facility. Natura will also bring 32 proprietary cannabis strains to Emblem’s library, significantly increasing Emblem’s intellectual property.

Emblem currently has supply agreements with Shoppers Drug Mart, the province of Alberta, and has an LOI to form a joint venture with German pharmaceutical wholesaler Acnos Pharma GmbH. Emblem also has submitted an application to supply the Ontario Cannabis Stores in Ontario. Under Emblem’s portfolio, it is expected that Natura will be a stand-alone brand in the recreational market, joining Symbl, Emblem’s recently launched recreational brand.

Outlook

We remain very bullish on Emblem’s opportunity. They are – as we have spoken of previously – a real acquisition target given their substantial cash balance. The issue with this deal, is that they seemed to have changed their strategy. From the offset, it was to acquire partial stakes in producers in order to guarantee supply (and not own it). Now with this purchase, they have chosen to actually own the supply, which we are not in favour of. It’s almost like they want to be everything to all in the industry, which we feels diminishes from their strong pharmaceutical focus.

The above view was ratified when Emblem also went on to announce a strategic partnership with GreenSpace Brands to develop and commercialise CBD infused health and beauty products for the recreational cannabis market. The partnership will leverage GreenSpace’s expertise in consumer brand development and distribution to launch products infused with Emblem’s CBD extracts across a number of verticals including beauty, health and wellness, supplements, food and beverage. Expansion into edibles and consumables using cannabis CBD extracts will move forward when these additional products are permitted under applicable regulations, expected in 2019.

Again, while we are in favour of this deal in a vacuum, it once again dilutes the strophic focus of what was (and continues to be) a pharmaceutical play on their behalf. We will keep you updated on further developments from the above.

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