FLORA Growth is set to acquire 100% of German medical cannabis and pharmaceutical operator Franchise Global Health in a major deal estimated to be worth over C$40m.
The ‘transformative’ deal, announced last week, will see Flora establish a significant foothold in Europe’s largest medical cannabis market as Germany speeds towards the launch of an adult-use market that could be worth over €1bn by 2026.
Last week’s announcement from German Health Minister Karl Lauterbach, however, means that Flora, which has one of the largest cultivation operations in the world in Colombia, will be blocked from importing any product for the upcoming market.
Despite this, Flora’s Chairman and CEO Luis Merchan remains undeterred, telling BusinessCann: “We invest based on what is available to us and what we can realise today. We’ll be ready for the recreational market when it’s ready for us.”
The Acquisition
NASDAQ-listed international cannabis operator Flora, which has a current market capitalisation of US$48m (C$65m), announced on October 24, 2022, that it had signed a definitive agreement for an all-stock acquisition of Franchise Global Health.
The proposed acquisition will see Flora acquire all of the issued and outstanding shares of Franchise Global.
In exchange, Flora will issue between 36.5m and 43.5m of its common shares ‘as calculated in accordance with the arrangement’.
This arrangement is based on a minimum exchange ratio of 0.24 Flora shares for each Franchise Global share, and a maximum of 0.32. It is dependent on the number of outstanding Franchise Global shares, and the closing price of Flora’s shares on the closing date, which has not yet been specified.
According to the 20-day volume weighted average price of Flora’s shares as of market close on October 21, this would value the deal at around C$40m (US$29.3m).
The actual value of the deal could be significantly lower than this, however, as like many of its peers, Flora’s share price has trended down since the start of 2022, reaching historic lows of US$0.52 on the day the deal was publicly announced.
News of the deal has helped push Flora’s shares up around 20%, sitting at around $0.61 at the time of writing, which would value the deal at up to C$36.2 (US$26.5m).
When the deal closes, Franchise Global’s former shareholders will own between 32.06% and 36% of Flora’s issued and outstanding shares.
Flora will also take control of all of Franchise Global’s subsidiaries, including medical cannabis and pharmaceutical distributor Phatebo, and ACA Müller, the recipient of Germany’s first medical cannabis import and distribution licence.
Access to Europe’s Largest Markets
Flora already boasts a widespread footprint across Europe, seeing its CBD brand JustCBD sell throughout the UK and become one of the few brands included in Amazon UK’s CBD pilot.
In September this year, Flora reported its first exports of dried high-CBD cannabis flower from Colombia to Switzerland and Czechia.
Flora’s operations elsewhere across the continent are growing steadily, but its acquisition of Franchise Global will supercharge its expansion into its key medical cannabis and pharmaceutical markets.
“When you look at flower, the most important market in the entire globe today is Europe,” Mr Merchan explained.
“And when you’re looking at Europe, Germany is by far the single most important, just because of the sheer size of the economy, but also because of the meaningful moves that are happening there from a regulatory and legal standpoint.
“Then we’re, of course, utilising Switzerland and the Czech Republic. But there are different constraints there – our strains into Switzerland are less than 1% THC.”
Now, Flora will be able to sell its high-THC product through 1,200 pharmacies throughout Germany, while utilising Franchise Global’s pharmaceutical distribution network spread across 28 countries.
This ready-made supply chain has already seen Franchise Global achieve ‘meaningful and robust revenues’ in Germany, reporting C$13.5m in sales in its second quarter this year, almost entirely attributable to its recently acquired distribution company Phatebo, alongside net losses of around C$1m.
While Mr Merchan says the acquisition is expected to ‘significantly increase’ international revenues in the short term, he explained that it would also ‘dramatically expand our product portfolio’.
“[Franchise Global] have cultivated a tremendous amount of assets along the way, including a seed bank of over 1,200 strains. And why that is important is because it allows us to take that incredible asset and IP and bring it to our cultivation facility and start to grow more strains that perhaps will match the needs of consumers as they evolve over time.”
At its seed bank in Denmark, Franchise Global is understood to house 286 strains, 41 of which are already registered in Colombia. In contrast, Flora reportedly has just 12 strains.
Import Ban
Flora’s entrance into Germany marks the latest in a string of multinational cannabis operators targeting the market as excitement builds around its proposed adult-use market.
In a press release announcing the deal, released before the Health Ministry’s key points paper was published last week, Flora said the deal would ‘provide an additional upside should Germany proceed with the legalisation of adult-use recreational cannabis’.
The key points paper confirmed that the proposed market would be entirely supplied by cannabis grown in Germany, and that imports would be banned.
With no German cultivation operation to speak of, this would all but prevent the newly combined entity from staking its claim in the market.
Mr Merchan says that, for now, ‘we’re not concerned with that because the medicinal cannabis market in Germany is growing rapidly’.
“This is the mistake that a lot of cannabis companies may have made over time; they invest based on what could potentially happen in terms of their regulatory framework. We don’t do that; we invest based on what is available to us and what we can realise today.”
He added, however, that while he ‘wasn’t surprised’ Germany had chosen to ban imports initially, he believed this was eventually going to change.
“But I do know, and the facts are clear, that in order for the demand to be met there’s going to have to be your imports. That will eventually happen.
“So, I think what you see today is a result of the current legal framework not only within Germany and the European Union, but also globally. As that framework changes, so will these initial pieces of legislation.
“That is something that is going to have to sort itself out. We’re going to focus on medical, we’re gonna focus on our CBD consumer packaged goods. And then we’ll be ready for the recreational market when it’s ready for us.”
