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Tilray Inc. is buying an upstart Ontario-based cannabis producer in a bid to shore up cultivation space amid a severe supply crunch that has hampered sales.

Nanaimo, B.C.-based Tilray said Tuesday it has agreed to pay $35-million in stock-and-cash to acquire Natura Naturals Holdings Inc., a Leamington, Ont.-based firm that’s licensed to grow cannabis but not yet permitted to sell it to consumers. Natura was founded by the late Claudio Mastronardi, a businessman and greenhouse grower. Former Ontario minister of finance Dwight Duncan is a director at the company.

In recent years, big Canadian growers have gotten bigger both by building more capacity from scratch and by buying other companies for millions of dollars. Others, including Tilray, have said they would like to move away from directly owning production assets, instead opting to buy product from wholesalers. But Tilray’s deal for Natura shows doing that at scale still isn’t a viable option today for the largest players.

Natura referred a request for comment to Tilray, and Tilray declined an interview.

Many licensed producers have struggled to meet demand of patients and adult-use consumers since recreational cannabis was legalized on Oct. 17, derailing the launch of the new recreational system.

For its part, Tilray has especially been running low on medical cannabis, leaving patients scrambling. In November, the company said it mistakenly predicted that the legalization of recreational cannabis in Canada would temper demand for medical products. It failed to make enough of a popular medical product, sold marijuana into the wholesale market to other producers and increased its exports overseas.

According to its website, Tilray still doesn’t have any oils or strains of cannabis made with a high dose of cannabidiol (CBD) on offer. It is also suffering from a dearth in recreational cannabis as well.

“Tilray continues to see under-supply throughout the adult-use market,” Vivien Azer, an analyst at Cowen and Co. LLC, said Tuesday in a research report. “In particular, the company’s supply agreements with third-party farmers continue to disappoint on product quality.”

Cowen, a New York investment bank, provided a fairness opinion to Tilray’s board of directors in connection with the Natura transaction. It also took Tilray public in the United States last year.

With this deal, Tilray could see its growing capacity nearly double. Natura has a 662,000-square-foot facility, of which 155,000 square feet are currently licensed by Health Canada. Once fully licensed, that building could yield 70,000 kilograms of cannabis a year. It is located in the agricultural municipality of Leamington, near Aphria Inc., another large cannabis company.

Tilray is paying $20-million in stock and $15-million in cash, according to a news release. It will pay an additional amount up to $35-million if Natura reaches certain quarterly cultivation milestones during the next 12 months, which would push the price tag to $70-million.

The Natura deal was struck a week after early Tilray investors could start selling their shares in the open market. Tilray’s Nasdaq-listed shares have fallen more than 20 per cent since last week to US$72.80. Since going public at US$17 last summer, the stock has skyrocketed to as high as US$300 and is still worth US$6.8-billion.

Ms. Azer, the Cowen analyst, wrote in a separate note last week that Tilray executives have said it will take the company two or three years to “fully ramp” up production. She said the company’s recent hiring of Greg Christopher, who built a 25-year career in supply-chain management at Nestle SA, as executive vice-president of operations is a positive development.

She added that Tilray’s long-term strategy both at home and abroad is to buy cannabis from third-parties as an ingredient and focus on finished-goods manufacturing.

Last July, another cannabis company named Emblem Corp. signed a letter of intent to acquire Natura for a total of $76-million. At the time, Emblem had already invested $3-million in Natura. Last September, the pair terminated the planned deal.

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