WeedMD Inc., a federally-licensed producer and distributor of medical-grade cannabis, has entered into a definitive agreement dated November 29, 2019 to acquire Starseed Holdings Inc., a medically-focused, federally-licensed cannabis company providing cannabis to insured patients with coverage under their benefit plans (the “Acquisition”). The arms-length all-share Acquisition is valued at approximately $78 million, and Starseed’s strategic investor, the Labourers’ Pension Fund of Central and Eastern Canada (“LPF”), will make a concurrent $25 million equity investment directly into WeedMD. The Transaction bolsters the Company’s leadership position in the medical cannabis market through Starseed’s exclusive distribution and patient channels, provides important growth capital and fortifies WeedMD’s balance sheet.
The Acquisition creates a unique, high-margin sales channel for WeedMD’s low-cost, high-quality production, creating a vertically-integrated company that can execute across the entire value chain. Starseed has launched an industry-first partnership with Canada’s largest construction union, the Laborers’ International Union of North America (“LiUNA”), to provide medical cannabis as a fully-covered drug benefit for its more than 100,000 members and retirees in addition to their respective dependents.
“We believe that there are three pillars to long-term success in the cannabis space: quality production, unique distribution, and a strong balance sheet,” said Keith Merker, CEO of WeedMD. “This acquisition allows WeedMD to increase its distribution capabilities, maximize margins and access growth capital through a strategic investor.”
Angelo Tsebelis, President of Starseed, commented, “At Starseed, we have focused on building a unique sales platform that largely mirrors the pharmacy distribution model. Simply put, by making cannabis a paid benefit we have removed many of the barriers to mass market uptake of medical cannabis. Coupled with WeedMD’s high-quality cultivation assets and processing capabilities, we are well-positioned for accelerated future growth.”
LPF’s Strategic Investment bolsters the combined company’s financial position, bringing WeedMD’s pro forma cash balance to approximately $56 million (as at September 30, 2019 and including the $25 million Strategic Investment). Upon completion of the Transaction, existing WeedMD shareholders will own 55% of the newly-formed company while Starseed shareholders, including LPF, will own 45% (see Transaction Summary below for details).
Benefits to WeedMD Shareholders:
- Combining Complementary Operations Across the Value Chain: WeedMD is matching its low-cost production platform with Starseed’s high-margin sales channels to generate substantive margins. WeedMD’s production capacity creates ample supply for Starseed’s rapidly-growing patient base, currently at approximately 6,500 patients. Starseed is currently operating at a medical revenue run rate of approximately $10 million per year. WeedMD’s cultivation platform will also enable Starseed to scale the distribution of products in the adult-use market under its Saturday brand.
- Enhanced Processing and Distribution Capabilities: Wholly-owned by WeedMD, CX Industries is expected to reach a processing and extraction capacity of 200,000 kgs by year-end 2020, providing Canada and international markets with new and innovative consumption methods. By leveraging Starseed’s packaging and distribution capabilities at its fully-licensed Bowmanville facility, the Company has the necessary infrastructure to meet emerging industry demand, including expected growth in the retail environment in 2020.
- Significant and Immediate Cost and Revenue Synergies: Starseed’s cost of goods sold is expected to decrease significantly by transitioning from wholesale-purchased product to internally-produced WeedMD supply, creating an immediate production cost synergy. Furthermore, the Company has targeted SG&A savings of up to $10 million per year by end of 2020. On the revenue side, WeedMD expects to benefit from Starseed’s industry-leading average annual patient spend, which is approximately three times WeedMD’s predominantly business-to-business wholesale unit pricing, which creates a material, recurring, low-turnover revenue opportunity.
- Cornerstone Investor Fortifies Balance Sheet for Long-Term: Through its $25 million Strategic Investment into WeedMD, LPF is a supportive strategic investor. Upon completion of the Transaction, LPF will own approximately 29% of the pro forma company on a fully-diluted, in-the-money basis. LPF is one of the fastest growing pension funds in Canada.
- Broadens An Already Strong Management Team: Starseed’s management team brings extensive retail, medical, marketing, and financial expertise and experience, as well as strong industry and client relationships. These strengths are complementary to WeedMD’s cultivation and product-focused skillsets.
A summary of the amalgamated entity can be found on the WeedMD.com website or by clicking here.
Upon closing of the Acquisition, WeedMD will issue 71.8 million shares to Starseed shareholders, which will result in a pro forma ownership at close equal to: 62% (WeedMD), 18% (Starseed shareholders, excluding LPF), and 19.9% (LFP), on a fully-diluted, in-the-money basis. The Acquisition values Starseed at approximately $78 million based on the 15-day WeedMD volume-weighted average share price of $1.08 (“WeedMD VWAP”) ended November 27, 2019.
LPF has entered into a subscription agreement related to the Strategic Investment pursuant to which it has purchased subscription receipts (the “Subscription Receipts”) for aggregate gross proceeds of $25,000,000. The issue price of each Subscription Receipt shall be at a price equal to the greater of: (i) $1.0832, or (ii) the minimum price permitted by the rules of the TSX Venture Exchange. Upon WeedMD obtaining shareholder approval for the Strategic Investment, each Subscription Receipt shall be automatically exchanged for one WeedMD common share. Upon the exchange of the Subscription Receipts, pro forma ownership in the Company will be equal to: 55% (WeedMD), 16% (Starseed shareholders, excluding LPF), and 29% (LFP), on a fully-diluted, in-the-money basis.
The pro forma company’s board of directors will be comprised of four representatives from WeedMD and three representatives from Starseed. In addition, certain members of Starseed’s management will join the management team of the combined entity.
No WeedMD shareholder approval is anticipated in connection with the Acquisition. However, the Acquisition and Strategic Investment are subject to regulatory approvals, as well as other customary closing conditions.
The Acquisition is expected to close in December 2019. There will be a special meeting of WeedMD shareholder’s related to the Strategic Investment, which is expected to occur in February 2020.
WeedMD Approval and Recommendation
WeedMD’s Board of Directors (the “WeedMD Board”) has unanimously approved the Acquisition and Strategic Investment, determining that the Transaction is in the best interests of WeedMD and its shareholders. The WeedMD Board also received a verbal fairness opinion (the “Fairness Opinion”) provided by INFOR Financial Inc. that, subject to the assumptions, qualifications and limitations contained in the Fairness Opinion, the consideration being paid to Starseed pursuant to the Acquisition and the concurrent Strategic Investment, is fair, from a financial point of view, to WeedMD.
Starseed Approval and Recommendation
The Starseed Board of Directors (the “Starseed Board”) has unanimously approved the Acquisition, determining that the Acquisition is in the best interests of Starseed and its shareholders.
Certain Starseed shareholders, including LPF, who collectively beneficially own, or exercise control or direction over, approximately 68% of the outstanding Starseed shares (“Starseed Shares”), have entered into voting support agreements pursuant to which each has agreed to vote their Starseed Shares in favour of the Acquisition and all other matters in favour of the Acquisition.
Summary of Starseed Financial Information
Nine Months Ended September 30, 2019
|Cost of Goods Sold||$||7,335,923|
Advisors and Counsel
Stoic Advisory Inc. is acting as the exclusive financial advisor to WeedMD. INFOR Financial Inc. is acting as financial advisor to the WeedMD Board and provided an independent Fairness Opinion to the WeedMD Board. Torkin Manes LLP is acting as legal counsel to WeedMD.
Canaccord Genuity Corp. is acting as the exclusive financial advisor to Starseed. Dentons Canada LLP is acting as legal counsel to Starseed. NATIONAL Public Relations is acting as communications advisor.
WeedMD Inc. is the publicly-traded parent company of WeedMD Rx Inc., a federally-licensed producer of cannabis products for both the medical and adult-use markets. The Company owns and operates a 158-acre state-of-the-art greenhouse, outdoor and processing facility located in Strathroy, Ontario.