Interest in cannibidiol continues to grow

Cannibidiol (CBD) is for many a new wonder supplement. Derived from the cannabis plant, CBD is attracting investment at super charged multiples and drawing attention on a global scale. While products derived from the cannabis plant, which contain the psychoactive chemical Tetrahydrocannabinol (THC) are still banned for recreational use across much of the world, including the UK, there are two growing interests in the UK in the cannabis plant – CBD and medicinal use of THC.

CBD is a particular area of interest for investors. While the growing of plants for CBD extraction is achieved under licence from the Home Office, CBD can be widely sold with little regulation. Its supporters claim that CBD alleviates ailments including pain, inflammation, anxiety and insomnia, but it’s the surge in demand in mainstream products such as supplements, skincare, e-liquids and drinks that is creating the boom. These products can now be bought over the counter in newsagents across the country and in many big retailers, such as Holland & Barrett and Sainsbury’s, which even stock CBD-infused water by Love Hemp.

Market data is limited, and with the market growing so fast any data is soon out of date. In the UK regular users of CBD are estimated at around 300,000. However, we would expect this number to be a long way behind reality. Global use of CBD is estimated to be growing at nearly 40% per annum and is growing into a multi-billion dollar industry.

Traditional FMCG groups are now chomping at the bit to do something in the space. However, so far this is being done organically rather than through acquisitions, as it’s not yet clear which CBD newcomers they should acquire. Unilever has decided to launch hemp and CBD-inspired products. Firstly, a deodorant through Schmidt’s Natural and secondly, a CBD ice cream through Ben & Jerry’s – even if this future does depend on the FDA’s approval. Coca Cola was also thought to be “closely watching” the market after reports (which were later dismissed) surfaced of them potentially launching a range of CBD-infused beverages.

There is caution from traditional FMCG groups worried about the reputational risk of a product derived from the same plants as banned drugs. One major shareholder in Coca-Cola responded to its interest in CBD by saying, “It’s such a wholesome brand associated with happiness. Why do we want to associate it with a recreational drug? I think that would be a terrible idea.”

However, as new firms develop in the cannabis industry, M&A is beginning to happen. For example, in Canada, where the use of recreational cannabis has been legalised, a number of cannabis companies are growing quickly and raising significant investment from private equity funds or from the listed markets. These cannabis firms are tending to follow a strategy of vertical integration controlling the growing of plants right through to owning the consumer brands. With their ability to raise finance and healthy valuations they are investing globally. For example in May, Canopy Growth acquired UK beauty and wellness brand, This Works, in a deal worth €46m. This Works makes a range of beauty and wellness products including pillow sprays, moisturisers, body oils and eye-care products. The deal will see This Works launch a range of CBD infused sleep, beauty and skincare products.

These vertically integrated businesses also need to expand their growing capacity to meet this demand. Recently, Sundial Growers acquired Bridge Farm, a UK market leading grower of ornamental plants, flowers and herbs. Bridge Farm, who were advised by Clearwater International, was acquired for its growing capacity with Sundial planning to use its facilities to grow plants for CBD production as well as continue to service its existing customers.

Conclusion

It’s clear the market has huge potential for future growth, not just for consumer and food and beverage brands, but also for companies in testing, inspection and certification. These will be able to take advantage of the delicate environment surrounding CBD regulation.

We would expect to see further investment in the space with cannabis companies looking to provide additional growing capacity, or acquiring consumer brands where there is opportunity to add CBD to their product range. With cannabis companies needing to grow to justify their valuations, we expect there to be many more deals to come.

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