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Part of cannabis and investing

Cannabis grower Tilray Inc. is acquiring hemp food company FHF Holdings Ltd., known by its brand name Manitoba Harvest, for roughly $400-million in cash and shares, as both firms look to capitalize on the emerging cannabidiol market in the United States.

Manitoba Harvest is best known for selling hemp seeds, oils and protein powders in grocery stores throughout Canada and the United States. Over the past year, the Winnipeg-based business has been developing products made from hemp-derived cannabidiol (CBD), the non-intoxicating cannabis compound that has become popular as a nutritional supplement and cosmetic additive despite its grey legal status on both sides of the border.

Tilray, based in Nanaimo, B.C., will pay Manitoba Harvest’s current owners $150-million in cash and $127.5-million worth of shares up front, and a further $50-million in cash and $42.5-million in shares six months after the deal closes. The company may pay a further $49-million in shares if Manitoba Harvest meets certain milestones.

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Manitoba Harvest intends to continue its food business as before, sourcing hemp from Canadian prairie farmers and extracting hemp hearts and hemp oil for domestic and international consumption. The CBD side of the business, however, will focus on the United States, where the federal government recently removed hemp-derived CBD from the Controlled Substances Act.

Hemp-derived CBD is still regulated in the United States by the Food and Drug Administration (FDA), which is taking a conservative approach to the product, monitoring false marketing claims and reiterating a prohibition on CBD-infused foods and drinks. However, industry participants are hopeful that CBD will soon be treated like other natural health products, grown by farmers, extracted and packaged by mainstream companies such as Manitoba Harvest, and distributed through grocery store and pharmacy channels.

"There’s a lack of clarity [from the FDA], but we expect that clarity to be resolved in the next six months,” said Brendan Kennedy, chief executive of Tilray. "The existing distribution network for Manitoba Harvest products is extensive. We think that the [U.S] distribution channel for the new hemp-derived CBD products will be similar to their existing distribution chain.”

Manitoba Harvest, which has operations in Minneapolis, has already begun to sign CBD supply contracts with U.S. hemp farmers and extraction companies, and intends to begin selling CBD tinctures, gel caps and sprays this summer.

“Most of our retailers … are already trying to understand how they can bring CBD in, and they want to bring it from us, because we have that 20 years of experience [selling hemp products],” said Manitoba Harvest chief executive Bill Chiasson.

Despite the legal uncertainty, the product category is already taking off south of the border. Sales of hemp-derived CBD in the United States grew from US$129-million in 2016 to US$190-million in 2017, according to market research firm New Frontier Data. By 2020, sales could reach US$450-million, the firm estimates.

A recent research note from Piper Jaffray analyst Michael Lavery cited “industry contact” Miguel Martin, the CEO of Reliva CBD Wellness, who estimates the U.S. CBD market – including CBD from non-hemp sources – “may be [US$2-billion] in retail sales, and could grow to [US$5-billion] by 2020, the vast majority of which is online.

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“He believes [around] 50 per cent of convenience stores may carry a CBD product by mid-2019, and potentially 70 per cent of total retail outlets carrying a product by 2020,” Mr. Lavery wrote.

That prospect is drawing in other Canadian cannabis companies. In January, Canopy Growth Corp. announced plans to spend between US$100-million and US$150-million developing a “hemp industrial park” in New York State. In the fall, it acquired a Colorado-based hemp research company for more than $400-million, cash and stock.

The outlook for CBD in Canada, however, is significantly less favourable and Manitoba Harvest does not plan on selling CBD products in its home market, at least at first.

Despite a more liberal approach to recreational marijuana than in the United States, Canada’s new regime treats CBD as a cannabis product. That means CBD can only be sold in licensed dispensaries or directly to medical patients.

Food and cosmetic companies, eager to sell CBD products when edibles and topicals are legalized later this year, have been lobbying the Canadian government to reclassify CBD as a Natural Health Product (NHP). Health Canada has said that it intends to look at the issue of cannabis-based NHPs but has given no timeline for a review.

“CBD retail in Canada is a lot more uncertain. However those products get distributed, it's really a different regulatory framework than the hemp food products that Manitoba Harvest currently retails in Canada," said Mr. Kennedy.

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The deal is Tilray’s first major acquisition since going public last summer – although the company has been lining up partnerships with established firms, including alcohol maker Anheuser-Busch InBev SA/NV and pharmaceutical firm Sandoz AG, a subsidiary of Novartis International AG.

Blake, Cassels & Graydon LLP acted as Tilray’s Canadian counsel on the deal, while Cooley LLP handled the U.S. side of the transaction. Stikeman Elliott LLP acted as legal counsel to sellers.

Available now: Cannabis Professional, the authoritative e-mail newsletter tailored specifically for professionals in the rapidly evolving cannabis industry. Subscribe now.

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