The deal was announced earlier this week. Its unusual structure seems to be symptomatic of the tumultuous nature of the business. The deal is valued at $18 million upfront but could be worth as much as $150 million over time.
Deal based on future performance
Neptune, which is based in Laval, Quebec, said it will acquire SugarLeaf on a debt-free basis for initial consideration at closing of $18 million, paid as $12 million in cash and $6 million in common shares. By achieving certain annual adjusted EBITDA and other performance targets, additional consideration of up to $132 million would be paid over each of the next three years as a combination of cash and shares for a maximum aggregate purchase price of up to $150 million.
The company said SugarLeaf brings with it what Neptune calls ‘cutting edge cold ethanol’ processing technology that is housed at a facility in Conover, NC. That facility has a theoretical capacity of up to 1.5 million kg of raw hemp annually. The company said SugarLeaf has relationships with American growers who already have the appropriate licenses and cultivation experience with the plant.
Neptune was one of the pioneers of krill oil as a dietary ingredient. After selling that business to Aker BioMarine, Neptune pivoted its Sherbrooke, Quebec processing facility to cannabis products. But the regulatory complexities of the hemp trade meant the company can’t in the short term export anything from that plant to the United States.
Tobacco belt could become hemp belt
So to play here, Neptune had to be here, so to speak. And after assessing the market and the future directions it might develop in, Neptune CEO Jim Hamilton said the Southeastern US is the place to be.
“We like the fact that they are in tobacco country,” Hamilton told NutraIngredients-USA. “We have the view that the tobacco belt with be the place with the best strategic position for this business in the future. There is a very large agri infrastructure there that will support the business going forward.”
In addition to its location and strategic agricultural partnerships, Hamilton said SugarLeaf had all of the t’s crossed and i’s dotted when it came to scientific and regulatory concerns. He said Neptune had toured the operations of a number of potential partners, and had seen companies that run the gamut from the naïve to the sophisticated.
The hemp/CBD industry includes players brand new to the manufacture of ingestible products, Hamilton said. It made for a sometimes frustrating search, because some companies still don’t understand what’s needed to run a successful and fully compliant production facility within this industry, he said.
“If there is one thing that characterizes the situation that is that a lot of the people in this industry don’t know what they don’t know. They don’t have much of an idea about GMPs, about questions of product stability, and the analysis that goes with that,” he said.
Knowledgable partners will have leg up
Extraction facilities that have those processes in place will have a big leg up in the development of the hemp/CBD industry, Hamilton said. If you were to pick the name of almost any big CPG company out of the hat, that firm will either have hemp products under development or will be in an active investigation phase. And companies at that level of the industry won’t have much patience for the need to educate potential partners on basic parameters of dietary supplement and food ingredient manufacture.
“That is an immense frustration for all of the consumer products companies that are active in this space,” Hamilton said.
The regulatory aspects of the hemp/CBD industry are still in turmoil. Former US Food and Drug Administration Commissioner Dr Scott Gottlieb MD, the agency had heard the message from lawmakers who want to find a legal way for these products to come to market. A public meeting set by FDA for Friday, May 31 will be a first step in bringing some needed clarity to the situation.
“I think ultimately this business will be characterized by the companies we’ve known for many years. I would say that every company should have a project and a policy for what they are going to do when the market becomes fully clarified. Speed will be important because as things clarify they will move very quickly,” Hamilton said.