Is it a new trend for cannabis producers to switch to vegetables?

The Canadian entertainment cannabis market is severely oversupplied and highly competitive. In this context, Aurora Cannabis Inc (TSX: ACB)(NASDAQ: ACB) , a Canadian Cannabis producer, has actively sought to diversify and recently acquired a controlling stake in Bevo Agtech, a North n supplier of flowers and vegetable seedlings, the Sky Greenhouse is also planned to be transformed into a vegetable breeding base.

The company's actions raised questions about whether Aurora was giving up marijuana? What is the future of the cannabis industry?

Specifically, Aurora will pay $45 million ($35 million) in cash for a 50.1 percent stake in Bevo. In addition, Bevo will pay $12 million in Aurora stock if it meets its financial goals.

Carey Squires, head of corporate development and strategy at Aurora, said Bevo's ability to expand and make money was key to the deal. Cash flow will be critical if the company is to be sustainable in the long term and maintain its competitive edge. Aurora said Bevo continued to generate positive adjusted EBITDA and free cash flow, with sales of C $39M and adjusted EBITDA OF C $9m in the 12 months to 30 June 2022.

Bevo is an agricultural producer based in Langley, Columbia, which operates a 63-acre greenhouse in Columbia, specializing in vegetables including tomatoes, peppers and cucumbers, and the propagation of other plants, such as flowers and plants. In addition, Bevo will buy Aurora's Edmonton International Airport Sky Greenhouse Group for up to C $25 million.

Aurora said Bevo would continue to be run by the existing management team but would cede control of the board.

The use of Sky greenhouse will be changed to vegetable breeding

Aurora said Bevo plans to repurpose the Sky greenhouse for vegetable propagation and orchid cultivation. Squires said it was confident in Bevo's vegetable-breeding business and did not expect the company to grow cannabis in the future. There are multiple positives to the current vegetable business, such as food shortages, rising transportation costs, and the trend toward localised diets. Bevo believes this, and Aurora agrees.

Sky, once boasted by Aurora as the world's largest cannabis greenhouse, has been forced to cut capacity as sales have fallen amid deteriorating demand and supply in the recreational marijuana market and a competitive environment. In May, the greenhouse was officially closed for sale. Sky is now being sold for C $25m, down from an initial C $150M.

Aurora Cannabis posted large losses

Aurora said the company's shift to vegetable breeding would not change its core strategy as a long-term marijuana company. However, its cannabis business has lost c $5.4 bn so far and has yet to turn an annual profit. Squires said the opportunities for expansion in the cannabis industry were already limited, so it needed to diversify.

The deal is also Bevo's second marijuana acquisition. In 2019, it completed a reverse merger with Sun Pharm Investments and formed a new company, Zenabis Global. The 2021, Hexo Corp (TSX: Hexo)(NASDAQ: Hexo) , acquired Zenabis and Bevo was spun off. Zenabis filed for bankruptcy protection in June.

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