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Report on Business Cannabis Professional Zenabis RTO partner surges in first day of trading after merger announcement

  1. Zenabis Global will have access to 2.8 million sq. ft of greenhouse
  2. Bevo will continue traditional agriculture business
  3. Greenhouse conversion will be paced to match international medical cannabis demand

Bevo Agro Inc. shares surged nearly 70 per cent on Thursday, in the company’s first day of trading since announcing, earlier in the month, plans to merge with Sun Pharm Investments Ltd, owner of cannabis grower Zenabis Ltd.

The reverse takeover of Bevo by privately held Sun Pharm will see the creation of a new company called Zenabis Global Inc., focused on both cannabis production and agricultural plant propagation (Bevo’s traditional business). Sun Pharm shareholders will take 86 per cent of the new company, while shareholders of Bevo will get 14 per cent of the new venture.

The merger will create what could become one of the largest cannabis companies in Canada by production space. Zenabis, Sun Pharm’s existing licensed producer, already has three indoor growing facilities, in B.C. and New Brunswick (already licensed) and in Nova Scotia (not yet licensed). Together, these facilities have more than 600,000 sq. feet of production space, although only about half of that has been licensed by Health Canada, according to Zenabis CEO Rick Brar.

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The Bevo merger massively expands the growing potential of Zenabis, one of the last large LPs to go public. Bevo currently has 2.8 million sq ft. of greenhouse space in Langley, B.C. This will be steadily converted from its current use – growing baby poinsettias, herbs, cucumbers and tomatoes – to cannabis production over the coming years. Mr. Brar expects to convert 500,000 sq. ft of greenhouse space to cannabis in the first six months post-merger.

The new company won’t, however, abandon Bevo’s traditional business, which remains profitable, said Mr. Brar. Last year Bevo reported a net income of $2.7-million on $32.7-million in revenue. As Bevo’s greenhouse space is converted to cannabis, the company will acquire new greenhouse space on other properties for traditional plant propagation.

“We plan on investing over $100-million to retrofit that facility for cannabis. And we plan on adding an additional 2.8 million square feet in the coming years,” said Mr. Brar. “For every square foot that’s dedicated to cannabis we’ll be augmenting that with additional square footage.”

If Zenabis Global converts the entire 2.8 million square feet to cannabis production, it could have one of the largest cannabis greenhouse footprints in the country, comparable to companies like Aphria Inc. and Canopy Growth Corp. That means a lot more low-cost, commodity-grade cannabis coming onto the market in the coming years.

Zenabis plans to navigate domestic oversupply and price compression by feeding the international medical cannabis market, said Mr. Brar. It will pace its greenhouse conversion depending on European demand.

“We feel that right now is the right time, and we think top spot is wide open; we don’t think there’s a clear leader in the space,” said Mr. Brar. “We’ve built a real business, with tangible assets, and with real contracts; now’s the right time for us to come to market, and we plan on being in top spot.”

Sun Pharm raised roughly $57-million in connection with the transaction, mostly by issuing convertible notes. Before the transaction, the company had secured roughly $72-million from Mr. Brar, two other co-founders, and a “small group of very strategic investors,” Mr. Brar said.

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The merger has been approved by shareholders controlling 58 per cent of Bevo shares, but the transaction still needs the green light from the TSX Venture Exchange and the BC Supreme Court. It’s expected to close in December, and the merged company will continue trading under the ticker BVO.

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