Corporate Cannabis Gobbles Market in South Africa

CANNABIS CULTURE – South Africa’s Government say they are ready to roll-out their Cannabis Masterplan –  an attempt to bring cultivation into the open and formalize the multi-billion dollar potential of the industry.
The plan has jolted a rush of interesting mergers and takeovers amongst South Africa’s corporate cannabis players.
South Africa’s so-called cannabis Masterplan involves breeding programs for new dagga and hemp cultivars, including on-boarding indigenous dagga growers in the value chain. The masterplan’s vision is slated to take off in October 2021 when South Africa will begin rolling out and supervising permits for the production of hemp; increasing plowing acreage (and on-boarding historically marginalized black communities into legal cannabis cultivation); pushing corporate cannabis players to mentor Black South African growers. “In short, the cannabis Masterplan basically means industrializing cannabis production in South Africa,” says Reggie Ngcobo, the spokesperson for South Africa’s agriculture minister. On paper, this is necessary because South Africa’s cannabis industry has largely operated underground because it is thought that 900 000 growers work under the radar.
Merger deals galore
However, as soon as the Masterplan got warmed up, a flurry of merger corporate cannabis deals began to take shape among South Africa’s  industry players. For instance, Labat Africa in May offered R11.25 million ($816 000) for a 75% stake in Leaf Botanicals. Leaf Botanicals is one of the few local companies to hold a cannabis production license awarded by the South African Health Products Regulatory Authority. Leaf holds a South African Health Products Regulatory Authority license to produce dagga for medical use in the country´s arid Northern Cape province. 
Cannabis mergers motive
“Investors see South Africa´s cannabis market as bullish, virgin, and low-cost entry compared to well establish cannabis markets like Netherlands,” says Carter Mavhiza, an independent public accountant in Johannesburg. “Hence Labat branching into cannabis, a territory it has not much previous experience with.”
“Here’s the clue: until now there are not any cannabis stock registered on the Johannesburg Stocks Exchange, which is Africa’s largest stocks exchange. This is a stark difference from mature exchanges like the Toronto Stocks Exchange, which to the best of my knowledge has up to ten listed stocks that deal with cannabis. So with Labat in South Africa, it is seeking early-mover advantage, sensing that there’s is going to be a flood of cannabis stocks listed on South Africa’s exchange sometime nearby.”
South Africa’s cannabis startups are still way cheaper in market capitalization versus American and Canadian cannabis firms, hence companies with deep pockets but little cannabis business experience like Labat can afford to snap up cannabis stocks in South Africa at a way cheaper prices for now, and leave the operations to the specialist startups, and watch whilst their portfolios grow.
“Look at Leaf Botanicals, the cannabis firm that Labat bought. Just $816 000 for a massive 75% stake in a promising, specialist cannabis startup. That’s quite a bargain compared to the prices of EU or North American cannabis companies’ price tag. Where else in the world apart from South Africa do you buy a growth accelerating cannabis startup for the price of a suburban home?” asks Mavhiza, the financial analyst. 
When cannabis was legalized in South Africa in September 208, then the market was still full of noise and policy uncertainty argues Dennis Juru, president of the Africa Cross boarders Trading Association which lobbies for uniforms cannabis trade rules across countries in the southern part of Africa. Before the master plan, companies feared South Africa’s vast network of underground cannabis cultivators would drown out-licensed producers. The cannabis master plan has created solid hopes that rules will start to be enforced in favor of licensed commercial cannabis growers. 
“What you’re seeing with these cannabis mergers are players saying: hey, the underground cannabis black market is about to be throttled,” says Juru. “Let’s buy out promising South African cannabis startups before foreign Canadian, Japanese, Chinese, Dutch, American corporations hedge funds descend on our turf.”
This could be one of the reasons why South Africa cannabis investors know that foreign players are coming but they should invest in the South African cannabis sector on more or less the terms of local players. For instance, Labat also May partnered with American company Ace and Axle to produce and sell its “CBD smokables” in South Africa, thus shaping a trend where foreign companies enter the South African market under the control of local players.
“This is cannabis market ring-fencing, meaning domestic South Africa players banding up and creating early monopolies so that when Western corporations do come, and surely they are coming, they will play according to our rules,” added Juru. “The cannabis sector is getting very nationalistic worldwide.” 
The curious case of Highlands Investments
Among the high profile fresh merger deals in South Africa’s cannabis sector, the deal involving Gold Leaf, one of South Africa’s first commercial cannabis brands – and Highlands Investments (formerly Canopy Growth) in neighbouring Lesotho, is particularly interesting. Not least because it’s an R650 million ($45 mn) merger – which is a huge sum by South Africa market movement standards.
“This will be the biggest vertically integrated cannabis business venture in Africa. Highlands’s investors will get 35% shareholding in the resulting entity whilst Gold leaf will take 65%, the bigger share,” explains Warren Schewitz, the founder of Gold Leaf.
At first Lesotho, a country where Highlands operates from pulled ahead of its neighbour South Africa by quickly legalizing cannabis cultivation and gaining a license for its growers to export medical-grade cannabis to the EU – but South Africa’s new master plan is an attempt to take the cannabis mantle from the likes of Lesotho.  
“This particular merger deal signals that South Africa as a cannabis investment destination is a giant awakening and about to eclipse early African cannabis pacesetters like nearby Lesotho,” argues Juru, the trade lobbyist. 
 “South Africa with its massive financial pockets and land acreage has been underperforming until this masterplan brightened up things. So here the mergers between Highlands and Gold Leaf tell you one thing: investors want a foot in both baskets – Lesotho and South Africa. The issue is: investors are saying we don’t wanna miss the profit boat 5 years from now by being tied to one country.”

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