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Topic: Cannabis Investing

Expanding geographically can be a plus for cannabis producers

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Geographic expansion may not always work out, but it can be an effective way for cannabis producers to broaden their markets and reduce a key risk.


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Cannabis producers have lots of risk factors: but one way to lower those risks is to cut their reliance on a single geographic area. That’s especially critical in a highly regulated market like marijuana where different levels of government have a big say in the growing and sale of their products.

Geographic diversification can involve making sure they have cross-Canada operations. For example, Hexo Corp. (symbol HEXO on Toronto) is a Canadian-based producer and distributor of medical cannabis with production facilities in Quebec. Currently, Hexo’s distribution of medical cannabis is through 134 clinics with which it has agreements. It also sells through its online store. But to cut its risk, Hexo is now expanding across Canada. The company was also among the 31 producers selected by the B.C. government to supply recreational cannabis to the province. It has also now entered into a supply agreement with the Ontario Cannabis Store—run by the provincial government.

Cannabis producers can also branch out internationally to broaden their geographic reach. A good example here is Aphria Inc. (symbol APHA on Toronto). The company is now expanding into Latin America and the Caribbean with the acquisition of firms in Colombia, Argentina and Jamaica, and potentially Brazil. Aphria already has investments elsewhere around the globe, including The Kingdom of Lesotho, the first African country to introduce licenses for the cultivation, extraction, sale and exportation of cannabis for medical use.

Not all geographic expansion works out—especially when it it’s done through acquisitions, as is mostly the case with cannabis producers. A company can speed up its growth by buying other companies, rather than building on or duplicating its existing operations. But, while acquisitions speed growth, they also accumulate risk. After all, the seller of something always knows more about it than the buyer. When a company focuses on acquisitions for corporate growth—including geographically—it assumes it can out-perform the current management of what it buys. It assumes it can raise the return by a wide enough margin to increase its earnings, over and above the acquisition’s cost.

Sometimes that works out, sometimes it doesn’t. But when it does, it can help reduce risk, and enhance overall returns.

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