Cannasouth expands with 60% stake in Midwest Pharmaceutics
For Public Release
01 October 2019
Cannasouth expands with 60% strategic stake
in Midwest Pharmaceutics NZ Limited
Leading medicinal cannabis company, Cannasouth Limited (NZX: CBD) (“Cannasouth” or “the Company”) is pleased to announce it has today entered into an agreement to acquire a 60 per cent shareholding in Hawkes Bay-based Midwest Pharmaceutics NZ Limited for a purchase price of $1.32 million.
Cannasouth CEO, Mark Lucas
said: “Cannasouth Limited successfully raised
NZ$10m in its IPO to develop and grow a sustainable
medicinal cannabis business in New Zealand. The
acquisition of Midwest is a significant milestone for the
Company. Together with the recent Cannasouth Cultivation
Joint Venture, we have now implemented the key strategies
required to bring medicinal cannabis to the New Zealand
market, when regulations permit us to do
Established in Hastings in 2001, Midwest operates a GMP (Good Manufacturing Practice) compliant manufacturing and packing facility specialising in the manufacture, re-packing and wholesale supply of pharmaceutical raw materials, including both actives and excipients and the manufacture of dietary supplements and herbal extracts.
Its products are used by compounding pharmacies, hospitals, universities and pharmaceutical and veterinary manufacturers. Midwest also markets and distributes its own branded products and for the financial year ended 31 March 2019, generated revenues of $1.8 million.
Midwest Owner and Chief Executive Mark Balchin will continue as the CEO of Midwest and will also be appointed by Cannasouth as its Chief Manufacturing Officer following completion of the transaction. Having Mr Balchin on the Cannasouth senior management team will enable the synergies, integration and execution required to drive value from the transaction.
Mr Balchin holds a Bachelor of Technology in biotechnology and bioprocess engineering from Massey University. Before Midwest, he spent 10 years in the pharmaceutical industry, including time in the UK with British multi-national pharmaceutical company, GlaxoSmithKline.
Cannasouth’s investment will enable it to use Midwest’s existing GMP manufacturing facilities and operations, reducing the time and risk of building its own GMP certified facility from scratch.
“The capital cost, time and resources associated with the construction and establishment of a greenfield GMP certified production facility would be significant,” says Mr Lucas.
“This acquisition reduces the amount of time, capital costs and execution risks associated with the development of such a facility from ground zero.”
Mr Lucas says the investment structure of the transaction maximises the allocation of capital Cannasouth raised during its recent IPO and is an important step towards implementing the company’s vertical integration strategy “from seed to sale”.
“This acquisition will provide us with a well-established, top quality operating GMP certified facility currently generating good revenues with capacity to grow those revenues.”
Mr Lucas says the Midwest acquisition will provide Cannasouth a basis from which to develop its future commercial and operational requirements as a leading medicinal cannabis company in New Zealand.
“We will continue to develop and grow Midwest’s existing commercial operations and revenues and at the same time adapt the facilities to meet all regulatory requirements to produce and manufacture medicinal cannabis products as regulation allows.
“We will also be in a position to utilise Midwest’s existing licences and gain additional licences, along with adding manufacturing and product development expertise to support Cannasouth’s business operations.”
Midwest holds the following licences:
to Pack Medicines
Licence to Deal in Controlled Drugs
Licence to Wholesale Medicines
for Primary Industries (MPI) National program Level
3 – Licence to manufacture and pack food products
including vitamins and minerals
Toiletry and Fragrance Association of New Zealand Inc
Certificate to Manufacture Cosmetics
Principal terms of Cannasouth’s investment in Midwest
• Cannasouth will acquire 60% of the existing shares on issue in Midwest for $1,320,000.
• The purchase price is subject to adjustment during the month following settlement date, on finalisation of the financial position of Midwest as at the date of settlement.
• The purchase price shall be satisfied as follows:
- The payment of $800,000 in cleared funds on the date of settlement;
- The issue of 866,667 new ordinary fully paid shares in Cannasouth at an issue price of 60 cents per share. In the event of an adjustment to the purchase price, an adjustment will be made to the number of shares to be issued to the vendors. The vendors have agreed that the new Cannasouth Shares issued as part of this transaction shall be escrowed for a period of 12 months from the date of their issue.
• In determining the purchase price Cannasouth has attributed value to the strategic position and importance of the underlying production facility assets held by Midwest. The savings in time, costs and reduction in execution risk to Cannasouth in securing a strategic interest in a GMP certified facility that has existing revenues, operational expertise, and profitability are significant.
• Settlement for the transaction is anticipated to occur before the end of October, subject to the satisfaction of the conditions precedent.
• The transaction is conditional upon the parties receiving all approvals and consents from the landlords to the premises which Midwest utilises, and from those counterparties to certain business contracts, which contracts require the consent to a change in control of ownership of Midwest.
• Cannasouth shall have a call option to acquire half of the vendors remaining shares in Midwest anytime during the period between 1 January 2023 and 30 June 2023 , and shall have a further call option to acquire the balance of the shares held by the vendors during the period between 1 January 2025 and 31 December 2025. In conjunction with the two call options, the vendors shall have a put option whereby they may require Cannasouth to purchase the remaining shares held by the vendors in the Company during the period between 1 January 2025 and 31 December 2025.
• As part of Mr Balchin’s remuneration package with Cannasouth for his role as Chief Manufacturing Officer, Cannasouth will issue Mr Balchin 300,000 options to acquire shares in Cannasouth pursuant the Cannasouth Employee Share Option Plan. The exercise price for those options shall be 60 cents per option exercised. The options shall vest in three equal parcels over three years and shall have a maximum term of four years.
Capital structure following completion
Assuming the Midwest transaction proceeds to completion, the capital structure of the Company following the acquisition of Midwest is set out below:
|Current Ordinary Shares on issue||104,777,778|
|Shares issued to partially fund the purchase of Midwest||866,667|
|Total Ordinary Shares on issue post-acquisition||105,644,445|
|Options currently on issue||3,050,000|
|Options to be issued to Mark Balchin||300,000|
|Fully diluted capital structure||108,994,445|
Auckland-based specialist corporate and capital markets advisory firm, CM Partners, has advised Cannasouth on this transaction.