Canopy-Hiku is kind of a big deal.

Canopy Growth (NYSE:CGC) and Hiku Brands Company (CSE:HIKU) announced the closing of their acquisition deal. Hiku's shareholders met on the 30th of August and a unanimous vote in favour of the transaction was passed.

The required shareholder approval thresholds were met, with the deal being approved by approximately 99.4% of the votes cast by Shareholders present in person or represented by proxy at the Meeting. 

"Since day one we've believed in a singular vision – that recreational cannabis is a consumer product and that consumers will ultimately choose brands they identify with from exceptional retail environments."

Alan Gertner, CEO, Hiku.

The transaction means that Hiku is now a fully owned subsidiary of the Canopy Growth Family and that their shares are to be removed from the Canadian Securities Exchange as of today. Pursuant to the Transaction, Canopy Growth acquired 100% of the issued and outstanding common shares of Hiku and Hiku shareholders are entitled to receive 0.046 of a Canopy Growth common share in exchange for each Hiku Share held immediately prior to the closing.

While it was waiting on final approval from its shareholders, Hiku has been busy strengthening its retail footprint in Canada in anticipation of the oncoming recreational legalisation. Just two weeks ago the company was chosen as one of the providers for Ontario's online Cannabis Store. This gave Hiku access to 25 SKU's that can be sold to the Ontario market.

In addition to Ontario, Hiku has also signed supply agreements with British Columbia Liquor Distribution Branch. The agreement follows the similar agreement in Manitoba as well as with Tokyo Smoke. Both agreements allow for Hiku to start supplying it's retail products to the adult-use market.

This is a big deal

I have always maintained, that in the long run, the real winners will be those that control the retail market. Medicinal is going to be HUGE for sure, but the big money will be in the pharmaceutical companies that develop patentable IP (take GW Pharma, and their FDA-approved drug – Epidiolex, as one example). However, in the retail market, it's a whole other story.

Make no mistake, this is Canopy flexing their muscles in the face of the oncoming wave of legalisation demand come October 17th. They can now add the likes of DOJA, Tokyo Smoke, Maitri, and Van der Pop to compliment their existing Tweed and Vert Brands.

"This places the taste-makers of tomorrow's cannabis industry on the same team."

Bruce Linton, Chairman, and CEO, Canopy Growth

The big margins will be in the retail footprint and "owning the consumer" online. Brick and Mortar will combine with their online divisions to create enormous brand loyalty and awareness. The biggest margin is always at the retail level. And its at this very level that Canopy is looking to grow. By buying the most retail focussed LP on the market, they have further imprinted themselves on the recreational landscape. And what a landscape it is proposed to be.

We all know that the Canadian recreational marijuana market will be big. The real question, however, is just how big?

The retail value of Canada's recreational market is hard to pin down, as the rules and regulations governing the new industry have yet to be finalised. 

  • Recreational cannabis will be sold initially for $8-10 per gram.
  • Based on pricing trends in Colorado's recreational market, this will fall to $6.25 by 2021. 
  • Assuming Canada's black-market prices fall at a similar rate as legal marijuana prices, approximately 80% of all marijuana consumption will take place in the legal market by 2021
  • 95% of all legal marijuana users will purchase from the recreational market by 2025

And it's not just locally either.

Set to be the first major country to legalise the sale of recreational marijuana, Canada will likely draw a significant number of international tourists looking to partake legally. Even conservative estimates suggest tourist spending on recreational marijuana will be in the hundreds of millions of dollars.

And the above still does not take into account the ancillary market.

A 2016 study from Deloitte estimated that a legal market for recreational marijuana – including growing and distribution, pot paraphernalia, and business taxes – would create an ancillary marijuana industry that would amount to $13-$23 billion annually.

So, congratulations to Canopy for a very, very good purchase. If you are still looking for the magic thread that makes the binding of this agreement so strong, look no further than Facebook's purchase of Instagram and Whatsapp. It's all about the end users at the end of the day.

And they told you money doesn't grow on trees.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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