Aphria buying Broken Coast Cannabis for $230M in stock and cash

Licensed marijuana producer Aphria Inc. has signed a deal to buy Broken Coast Cannabis Inc., a cannabis producer on Vancouver Island, in a transaction it valued at $230 million in cash and stock.

Under the agreement, Aphria will pay up to $10 million in cash with the remainder in shares based on a deemed price of $15.09 per share.

"Adding one of Canada's most sought after premium brands represents a major triumph for Aphria and our shareholders and firmly establishes our position as a Canadian leader in premium indoor cannabis production," said Aphria chief executive Vic Neufeld in a statement Monday.

Shares of Aphria surged 20 per cent after the deal was announced, adding $3.68 on Monday to hit $21.70 on the TSX.

Broken Coast operates an indoor cannabis production facility on Vancouver Island that it is expanding. As part of the transaction, Aphria has approved a further expansion project that is expected to increase the facility's annual capacity to 10,500 kilograms per year. The deal is anticipated to close by Jan. 31.

Each of the three co-founders of Broken Coast are expected to remain with the company.

"While we are joining a talented large-scale greenhouse operator, Broken Coast will retain a high level of independence and our existing management and production teams will continue to drive our corporate strategy," Roberto Bresciani, director and co-founder of Broken Coast, said in a statement.

The acquisition comes less than a month after the Leamington, Ont.-based medical marijuana producer said it planned to invest $10-million in a venture merging two cannabis brands to target the incoming recreational pot market in Canada.

That deal merged Ontario-based Tokyo Smoke, which Aphria already holds a stake in, and B.C.-based DOJA Cannabis Company. The new company is expected to be renamed as Hiku Brand Co. Ltd.

Aphria's acquisition of Broken Coast is also the latest sign of consolidation in the Canadian cannabis sector.

Last year, Edmonton-based licensed producer Aurora Cannabis Inc. launched a hostile, all-stock takeover bid for CanniMed Therapeutics Inc. The Saskatoon-based licensed producer has urged its shareholders to reject Aurora's bid, saying its own acquisition of the Tragically Hip-backed Newstrike Resources is a superior transaction.

Vahan Ajamian, a research analyst with Beacon Securities Ltd., says Aphria's acquisition reinforces his view that mergers and acquisitions in the cannabis sector will "accelerate" over the course of the year as companies gear up production ahead of recreational sales of pot becoming legal this summer.

"Key components could include combinations of indoor and greenhouse production and establishing facilities in multiple provinces (both hallmarks of the Aphria - Broken Coast announcement)," he said in an email. "We foresee more such tie-ups in the sector, including deals between cannabis companies and alcohol/tobacco/pharma companies."

Roughly 87 per cent Canadian cannabis companies believe that consolidation in the sector is inevitable over the next three years, a November survey by consultancy EY suggests.

The survey of 11 licensed producers, of varying size and scale, also suggests that three quarters of respondents believe the market will be dominated by the entrance of big players from the tobacco, pharmaceuticals and alcohol industries.