Sunday , May 16 2021

Connections and takeovers illuminate the cannabis sector




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These are marijuana products exposed at the Cresco Labs CY + Dispenser in Wintersville, Ohio, on the first day of sale as part of a medical marijuana program at Ohio on Wednesday, January 16, 2019. (AP Photo / Gene J. Puskar)

RELATED TEXT

Last week, Cresco Labs announced that it would be the largest acquisition of a public company operating in the US cannabis industry so far, agreeing to purchase CannaRoyalty (dba Origin House) in a $ 825 million transaction. Cresco Labs is a multi-state operator (MSO) based in Chicago, and the acquisition will give them a strong position in California, where Origin House operates as a distributor, manufacturer, cultivator and branding company. Investors accepted this deal, sending shares of Cresco Labs, which began trading in December, to the highest level of 10% more in the week.

Buying Cresco Labsa followed another major move four weeks ago, as well as Harvest Health & amp; Recreation announced $ 850m in anticipation of the acquisition of a private holding company, Verano Holdings, Chicago. Like the reaction to Cresc's job, harvest stocks jumped after the announcement. Consolidation is not only the American cannabis sector, since HEXO Corp. recently announced the acquisition of Newstrike brands for all stocks. And in this case, investors liked the job, which sent HEXO to a new peak.

M & amp; And nothing new in the cannabis sector, as we have seen significant consolidation in Canada so far. The first merger between licensed manufacturers (LPs) was Canopy Growth to buy Bedrocan Cannabis at the end of 2015, when the company was known as Tweed Marijuana. Canopy Growth followed this acquisition in early 2017, buying Mettrum, and added Hiku Brand in 2018. Last year, Aurora Cannabis completed the purchase of CanniMed Therapeutics and MedReleaf, two very large transactions, as these companies were among the leading LPs in revenue generation in Canada. More recently, Aleafia Health closed the acquisition of the Emblem. Tilray did not buy the entire company, but recently announced the purchase of Manitoba Harvest, the leading hemp company owned by Compass Diversified. This was followed after & nbsp; buying private LP in Ontario.

In the US, numerous MSOs were rather aggressive on the M & A frontpage, buying privately owned operators. Cresco Labs, for example, announced the acquisition of private maintenance & nbsp; VidaCann & nbsp; last month, transferring it to the Florida market. Green Thumb Industries is in the process of acquiring Essence, which is heavily present in Nevada, and is also in California, agreeing to pay $ 290 million, mostly on stock. Earlier this year, iAnthus Capital completed the acquisition of MPX Bioceutical's shares in the United States. The contract significantly expanded the iAnthus track and gave & nbsp; strong products and retail brands together with significant revenue.

Expect more M & amp; AND

The cannabis market is ripe for significant consolidation, and the lift we have recently experienced is probably just the beginning. In Canada, the number of licensed companies exceeds 140 (now there are 168, but several companies have multiple licenses). There are more than 50 publicly traded companies (most of them listed in Canada or are listed twice, but some are listed only in the United States), and that is probably too much. Although many of these companies will eventually disappear because they can not compete and eventually justify their estimates, we will probably see a continuation of consolidation. Just as HEXO Corp and Aleafia Health managed to find acquisitions that did not require a substantial premium, I believe we will see more players in the universe instead of trying to compete ourselves in a crowded market. We have also seen two very large strategic investment in space, with Constellation Brands achieving effective control of Canopy Growth and Altria gains effective control over the Cronos Group and perhaps more. I still expect the pharmaceutical company to acquire LP in Canada.

There are two areas in the US for M & A. First, more transactions from leading MSOs should be expected. The reasons why it is consolidated is an increase in the scope of business as well as a reduction in the cost of capital. Additionally, extended presence helps them expand and exploit their brands. Another area for consolidation is probably CBD in the area of ​​industrial hemp. We have already seen that TerrAscend, a Canadian LP, has made a small job to enter the American hemp industry (it also acts as a MSO in the state-regulated cannabis markets). The brand at the level recently bought & nbsp; cbdMD.

How to play M & amp; The theme

I was very happy when it comes to companies that are publicly traded in the cannabis sector because I had positions in one or more of their model portfolios on 420 investors in almost all the companies that were at the time of the announcement. Although it is not my intention to keep the shares solely because I expect them to be acquired, it is certainly something I have in mind. I also regularly share my subscribers with their expectations regarding potential consolidation.

Before I share some broad ideas, I want to share a very simple way to take advantage of M & A trend. When a contract is announced, the target company will usually trade with a significant discount on the implied price of the deal. The sector is far from effective, and this is an area where it is sometimes obvious. In addition to the lack of larger investors focusing on arbitration in such situations, the costs of borrowing short-term acquiring shares of the acquirer company may lead to opportunities for small investors. For example, Cresco Labs agreed to issue .8428 shares of its own shares for each share in the Origin House subsidiary, and this job probably went through. If the closing price of Cresco Labsa was taken on Friday at $ 16.55, then Origin House would have traded at C $ 13.95, but at C $ 12.57, after the transaction was executed. For anyone who wants to invest in Cresco Labs and who expects the job to go, paying $ 12.57 for Origin House is ultimately cheaper to do so because it represents a 10% discount. Again, this deal only works if the job is closed, and of course there is no guarantee that Cresco Labs will not fall in price, so there is no free lunch unless Cresco Labs sells Origin House (and closes the business) to proposed conditions).

In Canada, I still believe that consolidation will come between & nbsp; middle and small companies. I would concentrate on those who generate revenue and increase their business, such as those in Canadian cannabis Level 1 and Level 2 indices. Businesses with unique assets or business models are likely to be more attractive to prospective customers. Buying companies often mention different geographical regions or ways of production. One idea I've shared with my subscribers is to expect one or more US operators to buy smaller LPs to allow them access to global markets. & Nbsp; As I have already mentioned, I expect the pharmaceutical company to buy a Canadian LP company, and there are other possible types of out-industrial customers, including alcohol and tobacco companies, as we have already seen, as well as CPG companies as a whole. I do not expect Aurora Cannabis or Canopy Growth to do some more acquisitions in Canada.

In the cannabis-related sector of medicine and adult use, several MSOs still have gaps at their own pace. One area that could see some interest is California. This market was massive, but without regulation until 15 months ago, it was difficult for companies to make acquisitions more confidently. There are several state-owned publicly-owned companies, and Cresc's deal to buy Origin House should serve as a call to wake investors to focus on them (as well as private companies, of course). Up to now, the response was rather dampened for publicly traded stocks targeted at the California market. Apart from California, there are also some smaller operators with one or more countries that could fill in gaps and for larger companies. In addition, branded product portfolio companies may be attractive to MSOs. Finally, although many LPs listed in Canada can not invest in the cannabis industry governed by US states (or they may lose their TSX, TSXV, NASDAQ or NYSE lists), there are a few CSEs that could do so . Furthermore, I would not be surprised if the TSX or TSXV company on the list moved to CSE to enter the United States, which is a much greater opportunity than Canada.

The last area to be explored is CBD from industrial hemp site. I follow the closest Charlotte Web, CV Sciences and Elixinol, but there are also several others. In my opinion, those companies that already generate significant revenue could be considered as candidates for acquisition by leading companies wishing to enter the space while the regulatory environment is clarified. Perceptions have already changed dramatically since CVS and Walgreen now carry current CBD products, some of which are delivered by public companies. In addition to major companies, Canadian LPs and US MSOs could make acquisitions in this area. Trash Growing, Tilray, Village Farms and TerrAscend are already on the US market or are at least moving in that direction, while many MSOs including the 1933 Industry, Cresco Labs, Curaleaf, Green Brand Growth, and Anthus and Liberty Health.

Lower & nbsp; line

Consolidation increases in the cannabis area, and investors reward companies that buy their shares after announcements are announced. This will likely encourage other companies to be more aggressive in their M & And strategies. Investors can benefit in a number of ways, including determining predictable targets for acquiring or investing in their discounted prices after a job has been announced to take advantage of arbitration.

Disclaimer: I mentioned Aurora Cannabis, Canopy Growth, Charlotte Web, Cresco Labs, Green Growth Brands, and Anthus Capital, Liberty Health, and TerrAscend, my clients at New Cannabis Ventures, where we provide investor control panels on their behalf. We publish all clients of public companies& Nbsp;here, I do not own the shares mentioned in this article, although I can include them in one or more model portfolios at 420 Investor.

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These are marijuana products exposed at the Cresco Labs CY + Dispenser in Wintersville, Ohio, on the first day of sale as part of a medical marijuana program at Ohio on Wednesday, January 16, 2019. (AP Photo / Gene J. Puskar)

RELATED TEXT

Last week, Cresco Labs announced the largest acquisition of a public company operating in the US cannabis industry so far, agreeing to purchase CannaRoyalty (dba Origin House) in a $ 825 million transaction. Cresco Labs is a multi-state operator (MSO) based in Chicago, and the acquisition will give them a strong position in California, where Origin House operates as a distributor, manufacturer, cultivator and branding company. Investors accepted this deal, sending shares of Cresco Labs, which began trading in December, to the highest level of 10% more in the week.

Buying Cresco Labsa followed another big step four weeks ago, as Arizona's Harvest Health & Recreation company announced $ 850m to buy a private Verano Holding, Chicago MSO. Like the reaction to Cresc's job, harvest stocks jumped after the announcement. Consolidation is not only the American cannabis sector, since HEXO Corp. recently announced the acquisition of Newstrike brands for all stocks. And in this case, investors liked the job, which sent HEXO to a new peak.

Joining and merging is nothing new in the cannabis sector, since we have seen significant consolidation in Canada so far. The first merger between licensed manufacturers (LPs) was Canopy Growth to buy Bedrocan Cannabis at the end of 2015, when the company was known as Tweed Marijuana. Canopy Growth followed this acquisition in early 2017, buying Mettrum, and added Hiku Brand in 2018. Last year, Aurora Cannabis completed the purchase of CanniMed Therapeutics and MedReleaf, two very large transactions, as these companies were among the leading LPs in revenue generation in Canada. More recently, Aleafia Health closed the acquisition of the Emblem. Tilray did not buy the entire company, but recently announced the purchase of Manitoba Harvest, the leading hemp company owned by Compass Diversified. This was followed by the purchase of a private LP in Ontario.

In the United States, many MSOs were quite aggressive on mergers and acquisitions fronts, buying privately owned operators. Cresco Labs, for example, announced the purchase of private VidaCanna last month, getting it to Florida. Green Thumb Industries is in the process of acquiring Essence, which is heavily present in Nevada, and is also in California, agreeing to pay $ 290 million, mostly on stock. Earlier this year, iAnthus Capital completed the acquisition of MPX Bioceutical's shares in the United States. The deal significantly expanded the iAnthus track and gave it powerful products and brands along with significant revenue.

Expect more M & A

The cannabis market is ripe for significant consolidation, and the lift we have recently experienced is probably just the beginning. In Canada, the number of licensed companies exceeds 140 (now there are 168, but several companies have multiple licenses). There are more than 50 publicly traded companies (most of them listed in Canada or are listed twice, but some are listed only in the United States), and that is probably too much. Although many of these companies will eventually disappear because they can not compete and eventually justify their estimates, we will probably see a continuation of consolidation. Just as HEXO Corp and Aleafia Health managed to find acquisitions that did not require a substantial premium, I believe we will see more players in the universe instead of trying to compete ourselves in a crowded market. We have also seen two very large strategic investment in space, with Constellation Brands gaining effective control over Canopy Growth and Altria gains effective control over the Cronos Group, and more can see. I still expect the pharmaceutical company to acquire LP in Canada.

There are two areas in the US for M & A. First, more transactions from leading MSOs should be expected. The reasons why it is consolidated is an increase in the scope of business as well as a reduction in the cost of capital. Additionally, extended presence helps them expand and exploit their brands. Another area for consolidation is probably CBD in the area of ​​industrial hemp. We have already seen that TerrAscend, a Canadian LP, has made a small job to enter the American hemp industry (it also acts as a MSO in the state-regulated cannabis markets). Brand-level brands recently bought cbdMD.

How to Play M & A Theme

I was very happy when it comes to merging and taking over with cannabis companies in public trading because I had positions in one or more of my portfolio models at 420 investors in almost all companies that were acquired at the time of announcement. Although it is not my intention to keep the shares solely because I expect them to be acquired, it is certainly something I have in mind. I also regularly share my subscribers with their expectations regarding potential consolidation.

Before I share some broad ideas, I want to share a very simple way to take advantage of the M & A trends. When a contract is announced, the target company will usually trade with a significant discount on the implied price of the deal. The sector is far from effective, and this is an area where it is sometimes obvious. In addition to the lack of larger investors focusing on arbitration in such situations, the costs of borrowing short-term acquiring shares of the acquirer company may lead to opportunities for small investors. For example, Cresco Labs agreed to issue .8428 shares of its own shares for each share in the Origin House subsidiary, and this job probably went through. If the closing price of Cresco Labsa was taken on Friday at $ 16.55, then Origin House would have traded at C $ 13.95, but at C $ 12.57, after the transaction was executed. For anyone who wants to invest in Cresco Labs and who expects the job to go, paying $ 12.57 for Origin House is ultimately cheaper to do so because it represents a 10% discount. Again, this deal only works if the job is closed, and of course there is no guarantee that Cresco Labs will not fall in price, so there is no free lunch unless Cresco Labs sells Origin House (and closes the business) to proposed conditions).

In Canada, I still believe that consolidation between middle and small companies will come to an end. I would focus on those who earn revenue and increase their business, such as those in Canadian Tier 1 and Tier 2 cannabis. Businesses with unique assets or business models are likely to be more attractive to potential buyers. Buying companies often mention different geographical regions or ways of production. One idea I've shared with my subscribers is to expect one or more US operators to buy smaller LPs to allow them access to global markets. As I have already mentioned, I expect the pharmaceutical company to buy a Canadian LP, and there are other possible types of out-industrial customers, including alcohol and tobacco companies, as we have already seen, as well as CPG companies in general. I do not expect Aurora Cannabis or Canopy Growth to do some more acquisitions in Canada.

In the cannabis-related sector of medicine and adult use, several MSOs still have gaps at their own pace. One area that could see some interest is California. This market was massive, but without regulation until 15 months ago, it was difficult for companies to make acquisitions more confidently. There are several state-owned publicly-owned companies, and Cresc's deal to buy Origin House should serve as a call to wake investors to focus on them (as well as private companies, of course). Up to now, the response was rather dampened for publicly traded stocks targeted at the California market. Apart from California, there are also some smaller operators with one or more countries that could fill in gaps and for larger companies. In addition, branded product portfolio companies may be attractive to MSOs. Finally, although many LPs listed in Canada can not invest in the cannabis industry governed by US states (or they may lose their TSX, TSXV, NASDAQ or NYSE lists), there are a few CSEs that could do so . Furthermore, I would not be surprised if the TSX or TSXV company on the list moved to CSE to enter the United States, which is a much greater opportunity than Canada.

The last area to be explored is CBD from industrial hemp site. I follow the closest Charlotte Web, CV Sciences and Elixinol, but there are also several others. In my opinion, those companies that already generate significant revenue could be considered as candidates for acquisition by leading companies wishing to enter the space while the regulatory environment is clarified. Perceptions have already changed dramatically since CVS and Walgreen now carry current CBD products, some of which are delivered by public companies. In addition to major companies, Canadian LPs and US MSOs could make acquisitions in this area. Trash Growing, Tilray, Village Farms and TerrAscend are already on the US market or are at least moving in that direction, while many MSOs including the 1933 Industry, Cresco Labs, Curaleaf, Green Brand Growth, and Anthus and Liberty Health.

Bottom line

Consolidation increases in the cannabis area, and investors reward companies that buy their shares after announcements are announced. This will probably encourage other companies to be more aggressive in their M & A strategies. Investors can benefit in a number of ways, including determining predictable targets for acquiring or investing in their discounted prices after a job has been announced to take advantage of arbitration.

Disclaimer: I mentioned Aurora Cannabis, Canopy Growth, Charlotte Web, Cresco Labs, Green Growth Brands, and Anthus Capital, Liberty Health, and TerrAscend, my clients at New Cannabis Ventures, where we provide investor control panels on their behalf. We publish all clients of public companies here. I do not own the shares mentioned in this article, although I can include them in one or more model portfolios at 420 Investor.


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