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Energy bankers branch out into cannabis as legalization approaches

Medical marijuana producers, such as Tweed Inc. in Smiths Falls, Ont., stand to gain significant ground as early arrivals to the market, with opportunities available to snap up intellectual-property rights on different strains of cannabis.

Dave Chan/The Globe and Mail

Veteran energy-investment bankers are applying tried-and-true oil patch financing methods to a sector that's not so down on its luck – weed.

Sonny Mottahed, chief executive officer of Calgary-based Black Spruce Merchant Capital, said he and his team are taking a three-pronged approach to their first foray into the cannabis sector as legalization approaches.

He and Black Spruce colleague Dave Cheadle have set up a private-equity fund to invest in a range of cannabis-related businesses. They have also begun ground work on the firm's own greenhouse in Lethbridge, Alta., and are establishing a real estate investment trust that will act as landlord for medical- and recreational-marijuana producers.

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The moves come following months of study into what is expected to be an exponentially growing industry in Canada and elsewhere. The outlook for oil and gas has not been so bright as recovery from a two-year downturn has plodded.

Mr. Mottahed said the multibillion-dollar revenue potential for cannabis in Canada and elsewhere could be similar to two other industries that changed modern life – mobile telecom and online commerce. Ottawa has set July 1, 2018, as legalization date for marijuana, and several investors are betting on a boom.

"Would I have looked at it if the oil and gas industry hadn't cratered? Possibly not. But I saw it and compared it to these other two industries that had never existed before," he said. "I didn't participate in those other than investing in my own personal account. This one, I thought, as a principal investor makes a lot of sense."

Indeed, other energy professionals have said they are examining opportunities in cannabis as regulations become clearer at home and abroad. Black Spruce, founded by former Raymond James and Canaccord Genuity investment bankers in 2012, provides financing and advisory services to junior energy companies.

The firm's cannabis private-equity fund, CBi2, will close its first tranche of funding in early May and a second closing is planned about two months later. It is seeking $50-million in investment capital, targeting interests in up to 25 private and public companies.

For the REIT, the firm is in talks with a number of producers that are licensed by Health Canada to develop medical marijuana to spend up to a total of $100-million acquiring their properties to lease them back. It also plans similar deals in the United States.

"All of these facilities have been financed with equity and these businesses are not being valued on their real estate holdings but their cash-flow generation potential," Mr. Mottahed said. "So it's a non-dilutive form of financing for them to be able to take that capital and invest it directly into what the business is."

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Indeed, numerous oil and gas producers have done similar transactions in recent years, selling energy-processing facilities to specialized operators to redeploy the capital into operations or debt reduction.

The group is a late applicant into medical marijuana. Its $9.7-million greenhouse is expected to be completed later this year. The eventual aim is a sale to a larger company or an initial public offering, depending on market conditions.

The new producer, called Fifty First Parallel, aims to capitalize on what could be a tight Alberta market for recreational marijuana postlegalization. The company estimates Canada's overall recreational market at $6-billion by 2024.

Alberta's currently licensed producers include Aurora Cannabis Inc. and Acreage Pharms Ltd., according to Health Canada. Aurora is building a massive growing operation at the Edmonton International Airport to take advantage of the coming legalization.

"Our focus is to have the commodity, but we're capitalists. We're kind of looking at this opportunity and saying at some point in time it may make more sense in the portfolio of somebody else," Mr. Mottahed said.

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