Much like other industries, the cannabis market is no stranger to mergers and acquisitions (M&A), particularly in the case of larger companies absorbing smaller ones to accelerate future growth and innovation.
As PwC states, cannabis companies with extra cash on hand are on the watch for acquisitions that will expand their patent base, grow their consumer products and brands and expand into new and growing markets.
Cannabis producers such as Adastra Holdings Ltd. (CSE:XTRA) have also been in the cannabis M&A conversation through its acquisition of Phyto Extractions back in 2021. But first, let’s examine some of the M&A trends in the market and what some of the biggest M&As have been within the industry.
Recent cannabis M&A activity
Since 2019 – and notably when cannabis became legal in Canada – the market has seen its fair share of M&A activity.
Breaking that down, according to Ernst & Young, M&A trends over the years can be broken down as follows:
- 2019, 259 deals valued at US$5.9 billion
- 2020, 89 deals valued at $3.7 billion
- 2021, 222 deals valued at $17.4 billion
- 2022, 158 deals valued at $4.6 billion
In the past couple of years, M&A has decreased from that 2019 high within the market, particularly as larger companies have avoided mergers that could potentially decrease their stock price.
That doesn’t mean, however, that M&As have been completely eradicated within the market. Case in point, 2023 saw some significant mergers, including:
Adastra Labs acquired privately held 1204581 B.C. Ltd., doing business as Phyto Extractions – the intellectual property rights owner for the Phyto Extractions brands – back in September 2021.
Thanks to the acquisition of Phyto Extractions, Adastra Labs added Phyto’s product development expertise and its relationships with more than 1,400 retail stores across Canada to its portfolio.
“As a cannabis retail operator, I recognize the tremendous value Phyto Extractions will bring to Adastra. Phyto Extractions has already gained the trust of over 1,400 retailers and consumers across Canada, representing over 70 per cent of all regulated Cannabis retail stores,” Michael Forbes, CEO of Adastra Holdings, said in a statement. “I am confident that Adastra will leverage this position in the Canadian cannabis market to accelerate overall growth over the coming quarters as we enter new product categories.”
At the time of the acquisition, Adastra Holdings stated it had a goal of driving accelerated growth and profitably through several key elements, including:
- Product innovation by increasing the number of provincially listed Phyto Extractions-branded stock-keeping units (SKUs) in the Canadian market from 18 to 48 by expanding its offering into new product categories
- Optimizing in-store with full ownership of the Phyto Extraction brand asset. The company intended to engage in a targeting retail engagement strategy to optimize its in-store presence
- Expanding its retail footprint by leveraging the Phyto Extractions brand coast-to-coast
By February 2023, Adastra Holdings had completed a transaction to terminate a legacy supply agreement that will bring the Phyto Extraction brands 100 per cent in-house.
After the 2021 acquisition, a legacy license agreement remained in place where Phyto used a third party’s licensing status with Health Canada to exclusively package and sell its Phyto-branded cannabis consumer packaged products on its behalf in consideration for payment of royalties back to Phyto.
In August 2022, Adastra entered into an agreement with the third party giving Adastra the right and option to terminate the Phyto License Agreement subject to certain conditions.
“Phyto has experienced incredible growth in revenue and profits over the past year and is a revered brand in the industry,”Forbes said in a news release. “Having full control of the supply chain for Phyto allows us to streamline our business and retain 100 per cent of Phyto’s revenues for the benefit of Adastra’s shareholders.”
The Phyto-branded products reached sales of a little less than $6,700 in 2020 and more than $14,200 by 2021. As of February 2023, Phyto had 114 active SKUs stocked across eight provinces and territories.
Adastra Holdings CEO update
In late February, it was revealed that Forbes will be stepping down as the company’s CEO as of the end of March.
“It has been an honour and privilege to have served as CEO of Adastra during this significant restructuring phase. I am proud of where the company is today. Receiving our largest single purchase order of over $1 million is truly a testament to the hard work and dedication of our team. This milestone reflects not only our commitment to excellence but also the trust and confidence our customers have in our premium products,” Forbes said in a statement.
The company is currently in the process of finding and approving a new CEO after Forbes’ departure.
About Adastra Holdings
Adastra is a leading cannabis processor, producer and co-manufacturer catering to the adult-use and medical cannabis sectors.
The company distributes premium cannabis products and manages a portfolio of successful proprietary brands: Phyto Extractions and Endgame boast a robust presence with an expanding distribution network, symbolizing top-tier quality. Its products such as cannabis concentrates are accessible at 2,000-plus retail locations across Canada.
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