More than 80 percent of mergers and acquisitions fail to boost shareholder value, according to KPMG, often due to lofty valuations, incompatible cultures, excessive risk, or a combination of these factors. Of course, the cannabis industry has been no exception judging by the $835 million iAnthus/MPX merger and Cresco Labs’ acquisition of Origin House.
Companies that manage to beat the odds and make successful acquisitions have gone on to build tremendous value. Warren Buffett’s Berkshire Hathaway is a prime example of a conglomerate built on savvy acquisitions of high-quality businesses. Through smart acquisitions, its market capitalization has grown to nearly $500 billion in size over the years.
Red White & Bloom Brands (CSE: RWB) (OTC: RWBYF) has taken the Berkshire approach within the cannabis industry by pursuing savvy acquisitions and empowering the existing management team to build long-term value. After deploying acquisition capital at less than 1X of existing sales through its pending acquisition in Michigan, management demonstrated its discipline once again with the Platinum Vape deal.
Platinum Vape Acquisition
Red White & Bloom recently announced a binding letter of intent to make its first acquisition since becoming a publicly-traded entity. In a transaction valued at up to $60 million, the company agreed to acquire Platinum Vape, which sells a line of premium cannabis products at more than 700 retailers throughout Michigan, California, and Oklahoma.
Platinum Vape’s Market Leading Product Lines – Source: Red White & Bloom
Started by a father and son team nine years ago, Platinum Vape has grown into a business generating more than USD $70 million in current annual revenue without any outside investment. In addition to generating attractive 25% to 30% EBITDA margins, the Company boast merchandise in over 700 dispensaries in 3 States.
The company also proved that giving back to their community and supporting social causes, as they have through their REACT Foundation and namesake line of products, actually translates to stronger margins and customer loyalty.
Even though RWB is acquiring Platinum Vapes for less than 1X sales, the sellers have ensured that they have the ability to benefit from this valuation as shareholders of RWB upon closing of the transaction. In addition, management expects synergies worth between 7% and 10% of EBITDA to further unlock value over the long run. The deal marks yet another example of judiciously deployed capital to acquire high-quality brands and the willingness of well-built companies and their management to join RWB.
RWB anticipates closing the transaction in September 2020 with a definitive merger agreement following satisfactory due diligence and other conditions that are customary in transactions, including the receipt of regulatory approvals.
Becoming a Leading MSO
Red White & Bloom has quickly become one of the top five multi-state cannabis operators, or MSOs, in the country by focusing on major investments in U.S. markets, including Michigan, Illinois, Massachusetts and more recently in California and Oklahoma with the Platinum deal. The Company has also publicly stated they are keen on doing a deal in Florida as well, also evidenced by their exclusive store and product branding rights from “High Times” for the entire sunshine state. The company hopes to continue its growth trajectory to become a top three MSO through smart mergers and acquisitions as well as organically.
Red White & Bloom’s Growing Footprint – Source: Red White & Bloom
Currently, the company has pro-forma revenues from closed and binding acquisitions exceeding USD $100m and has projections to reach over $160 million in revenue and strong EBITDA margins between 25-30% this year.
From a branding standpoint, the company’s exclusive licensing agreement with High Times combines the largest Midwest cannabis operation with the world’s most iconic cannabis brand for over 46 years.
Beyond its retail footprint, the company has a large and expanding cultivation footprint that helps improve margins and ensure a consistent product. The company’s existing footprint of over 3.6 million square feet of CBD cultivation in Illinois, coupled with their plans to reach over 1 million square feet of indoor and outdoor cannabis cultivation over the coming quarters, will easily make them the largest in the US.
Red White & Bloom has become one of the most preeminent cannabis operators in the United States thanks to its ability to pick partners with significant retail dominance, brand offering and cultivation footprint. The planned acquisition of Platinum Vape underscores management’s commitment to an accretive M&A strategy.
Of course, RWB’s management team has also demonstrated its ability to execute in the past with two successful, strategic exits valued at $2.5 billion, including the second license in Canada and first EBITDA-positive Canadian licensed producer.
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