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Ontario cannabis grower WeedMD Inc. is acquiring union-backed cannabis company Starseed Holdings Inc. in an all-share deal valued at around $78-million.

As part of the transaction, Starseed’s main backer, the Laborers’ International Union of North America (LiUNA), is making a $25-million investment in WeedMD. The cash infusion from LiUNA comes at a time when many cannabis companies are having trouble raising money amid a dramatic sell-off in cannabis stocks.

"This not only helps to strengthen our balance sheet in a market where financing is becoming a challenge, but we now have the ability to accelerate some of our plans to be opportunistic,” said WeedMD CEO Keith Merker on an analyst call on Friday, shortly after the deal was announced.

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The Globe and Mail first reported details about the transaction on Thursday.

Toronto-based Starseed’s business model differs from most companies in the recreational or medical cannabis space. Starseed’s subsidiary, Starseed Medicinal Inc., focuses on providing insurance-covered medical cannabis to union members. It currently has an agreement with LiUNA Local 183 – the largest construction union in Toronto, with 57,000 members – to provide medical cannabis at preferential prices to members.

“Starseed brings a critical part of the business equation that has been difficult for the market to find: consistent, sticky distribution channels, with direct access to fully covered and insured patients," Mr. Merker said.

Starseed, a private company, operates out of a small production facility in Bowmanville, Ont., that it acquired from Canopy Growth Corp. in 2017 for $7-million. It does not cultivate cannabis, relying instead on buying product wholesale.

WeedMD’s stock price fell by around 20 per cent on Friday afternoon after the deal was announced. It’s unclear how much this was a reaction to the deal or to the company’s quarterly financial results, which were released at the same time.

WeedMD reported quarterly sales of $6.7-million, down from $8-million in the preceding quarter, and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $1.97-million, up from a loss of of $662,822 last quarter.

The company also reported worse than expected yields from its first outdoor crop, which was harvested in the quarter.

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The Starseed deal is WeedMD’s first acquisition of another licensed producer. It had signed a merger agreement with Hiku Brands Company Ltd., the owner of the Tokyo Smoke retail brand, in the spring of 2018. However, Hiku was acquired by Canopy Growth Corp. before the WeedMD deal closed.

In the spring, WeedMD bought a large greenhouse facility in Strathroy, Ont., from vegetable grower Perfect Pick Farms for $22.6-million.

Most of the company’s cultivation happens in Strathroy, both indoors and outdoors, in adjacent fields. The company is in the process of transforming its original growing operation in Aylmer, Ont., into a processing and packaging facility.

Correction: The first version of this story said WeedMD attempted to buy Hiku. In fact, the merger would have given Hiku a 51.75 per cent stake in the merged entity and WeedMD 48.25 per cent.

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