The cannabis beverage market is an emerging vertical that has been generating significant traction. The reason for the uptick in interest is simple, these products can be purchased from Canadian Licensed Producers (LPs) following a change in regulation in late 2019.
Although we are bullish on the Canadian cannabis beverage vertical, the big money will be generated by the states that have legalized recreational cannabis in the US. While the development in Canada in late 2019 is significant, the US cannabis beverage market has been booming for several years and we expect this trend to become more significant in the years to come.
During the last year, we have seen big alcohol brands enter the legal cannabis industry via strategic investments or partnerships. From Corona to Coors, big alcohol brands have become levered to the cannabis beverage market and this is a trend that leaves us bullish on the vertical. Until there is change in the way cannabis is viewed at the federal level, these large alcohol brands will only sell cannabidiol (CBD) beverages in the US.
We believe that cannabis legalization is coming to the US eventually, and we have been conducting due diligence on the companies that we believe will benefit from this. On the cannabis beverage side of the business, we believe that BevCanna Enterprises Inc. (CSE:BEV) (OTC: BVNNF) (FSE: 7BC) is an opportunity to be aware of.
This week, BevCanna entered into a definitive agreement to acquire Naturo Group Investments Inc., an established beverage manufacturer and distributor for both in-house and white label brands. The acquisition builds on a multi-year exclusive partnership between the companies and we expect this to have a positive impact on the transition process and make it more seamless once the deal is completed.
We consider BevCanna to be an underappreciated opportunity and are favorable on the leverage that it has to the cannabis beverage market. We consider the acquisition to be a transformational development for BevCanna and believe that the market is discounting the potential that is associated with the combined company.
From operational synergies to cost savings, to a more diverse product portfolio and access to distribution (Naturo has over 3000 points of distribution for their products), we expect the acquisition to prove to be immediately accretive to BevCanna. We believe that the strength of the relationship between the two companies will play an important role in how resources are allocated and who is managing the operation.
From a cost cutting and synergy standpoint, the agreement will eliminate future payments that are associated with BevCanna’s current master license agreement with Naturo.. This change will preserve future working capital and allow BevCanna to direct more resources towards the advancement of its domestic and international operations. We expect the acquisition to have an immediate positive impact on BevCanna and improves its ability to create shareholder value.
The acquisition represents a step forward for the combined company and has formalized the relationship in a way that combines the key strengths of each operator. From a valuation and growth standpoint, we believe that the combined company is more valuable than the sum of its parts and are favorable on potential impact the transaction will have on profit margins.
Combined Company is Positioned to Capitalize on the US
As part of the proposed business combination, BevCanna will take ownership of Naturo’s flagship brand, TRACE. We expect the brand to benefit from the resources that are owned by the combined company and will monitor how sales ramp higher on a going forward basis. From a partnership standpoint, we expect BevCanna and Naturo to find new avenues for growth, identify synergistic opportunities, and capture market share in strategic markets.
In 2021, Naturo plans to execute on a US expansion strategy and we expect BevCanna to play an important role in this. In Canada, the company develops and manufactures beverages and consumer products for in–house brands and white label clients like Keef Beverages. One of the US’s leading cannabis beverage brands, for exclusive distribution in Canada. They will also be able to leverage the types of retailers that sell Naturo products in Canada include 7/11, Loblaws, London Drugs, Metro and Farm Boy, and we are favorable on the existing distribution that the brand has.
Once the transaction is completed, Naturo will become a wholly-owned subsidiary of BevCanna and we expect to see the management team find significant synergies between the businesses. Due to the existing relationship between BevCanna and Naturo, we expect the transition to be seamless and consider this to be an important aspect of the story.
Through a master license agreement that was part of the exclusive partnership, BevCanna has access to Naturo’s 40,000 sq. ft. state-of-the-art beverage manufacturing facility. The facility is on a 315 acre property and is strategically located on an alkaline spring water source. We are favorable on the size of the property due to the potential for outdoor cultivation purposes and find this to be an attractive aspect of the story.
Trading at a Discount on Key Valuation Metrics
Earlier this year, an independent financial firm assigned Naturo an enterprise value that is between $38 million and $42 million (CAD). The firm came to this number by assigning a $10.4 million valuation to the property, a $3.4 million valuation to the beverage manufacturing equipment, and an $18 million valuation to the exclusive onsite natural alkaline spring water aquifer.
When combining Naturo’s assets with the assets that fall under BevCanna’s umbrella, we believe that you have a business that has a compelling valuation and a favorable risk-reward profile. BevCanna’s strategy to retain key human capital from Naturo leaves us confident in the combined company’s ability to execute. We believe that the management team of the combined company has diverse skills sets and the expertise that is needed to build a leading cannabis beverage brand.
One of the reasons we are bullish on the acquisition is related to the human capital that is associated with it. The management team of the combined company has decades of expertise in the field of consumer packaged goods (CPG), capital markets, corporate strategy, and public markets.
The combination will create the only fully licensed, in-house and white-label beverage manufacturing company that distributes both conventional and cannabis-based beverage and wellness products. We believe that BevCanna is well positioned to capitalize on a burgeoning vertical of the cannabis industry and will monitor how the story advances from here.
If you are interested in learning about the cannabis beverage company, please send an email to firstname.lastname@example.org with the subject line “BevCanna Enterprises” to be added to our distribution list.