Pot Stocks – Bulls and Bear Week 17

3.4 billion reasons why this is a killer deal!

It finally happens..a leading Canadian LP buys a leading US Multi-State Operator (MSO). The big news this week, was Canopy Growth's announcement of their acquisition (sort of) of Acreage Holdings for a cool $3.4 billion. We say "sort of" as the acquisition can only take place once the US formally legalises cannabis at the Federal Level. The binding obligation of this deal is for a period of 90 months or until legalisation, whichever comes soonest.

  • Canopy Growth has become the first major Canadian LP to purchase a U.S. multi-state operator 
  • Canopy will pay 0.5818 shares plus U$2.55 for each Acreage share, a 22% premium over April 17th closing.
  • Canopy will have the right and obligation to acquire ownership to Acreage when it is legally permitted.
  • This deal is win-win: Canopy expands its brands and its de facto footprint to the United States while Acreage gets access to capital before its U.S. peers.

Just two weeks ago we wrote of the fact that consolidation in the industry was gaining momentum, and that we envisaged it continuing on, and gaining momentum, in 2019. As the industry matures and the legislative environment starts to clear up, there will be no need to have so many companies operating, individually, in this space.

The current regime is in place solely due to U.S. laws that limit access to capital markets for U.S. cannabis companies. Because of those laws, cannabis companies have had to choose whether they wanted good access to capital or wanted access to U.S. cannabis consumers.



Canopy – and CEO Bruce Linton in particular – have a reputation for smart deal-making, and for pioneering industry consolidation, and once again, they have lived up to this reputation. The deal gives Canopy the right to purchase Acreage – when legally permissible – in other words, when the US opens up and federally legalises cannabis.

This is pure win-win for both companies. Canopy now has a chance to grow and sell its branded products into the most lucrative cannabis market in the world, and Acreage gets an influx of cash and the backing of the worlds #1 cannabis company.

We've always maintained that Canopy is a company of firsts. The first to secure a multi-billion investment from a non-cannabis company, the first to enter the US Hemp industry and now the first Canadian LP to acquire a leading MSO.

Acreage Holdings has 25 cannabis dispensaries and 87 dispensary licenses. Acreage's most recent quarterly results include US$10.5 million in revenue at 42% gross margins. However, Acreage lost (burnt) US$217.6 million last quarter, or US$2.63/share. Acreage's cash spending (US$202 million deployed last year) and Canopy Growth's deep pockets (C$4.1 billion in cash) mean a pairing here could be mutually beneficial.



The deal is subject to a vote from both Canopy and Acreage shareholders. If approved, Acreage Holdings investors will receive U$2.55 when the deal is completed. Acreage Holdings shares will eventually convert to 0.5818 Canopy Growth shares when cannabis is legalised at the Federal Level in the United States. This is a 22% premium over this Wednesday's closing prices.


"Today we announce a complex transaction with a simple objective – securing our entrance strategy into the United States as soon as a federally-permissible pathway exists"

 – Bruce Linton, Chairman, and co-CEO, Canopy Growth.


"By combining Acreage's management team, licenses and assets with Canopy Growth's intellectual property and brands, there will be tremendous value creation for both companies' shareholders." This is an awesome win-win deal for both companies.

Other MSOs have also rallied sharply on the news, as this acquisition is likely to spur more investment into MSOs. Personally, we think that Cronos and MedMen would be a very good fit. First off they already have an agreement to run MedMen Canada stores, and with Gotham Green backing MedMen with $250 million in funding, and the connections between Gotham Green and Cronos (Cronos CEO Mike Gorenstein is a founding partner at Gotham Green), it would seem like a natural fit. Food for thought – you heard it here first.

In other news, Acreage also announced this week their entry into Nevada through their acquisition of Deep Roots Medical for $20 million in cash and $100 million in shares. Deep Roots has four brands of cannabis products in Nevada, selling to nearly 80% of the dispensaries in Nevada. Deep Roots also has licenses to operate seven dispensaries, with one dispensary in operation and one dispensary under construction. The remaining licenses will allow for four dispensaries in the Las Vegas area and one dispensary in Reno.



Going, going, gone.

This week, Aphria released their results for their third quarter, ending February 28th. The press release itself began by discussing asset impairments on LATAM assets before moving on to operating highlights:

The Ontario Securities Commission requested as part of a continuous disclosure review that the Company perform an impairment test on its LATAM assets subsequent to the filing of the 2019 second quarter financial statements.

As a result of this impairment test conducted by the Company, the Company determined that a $50 million non-cash impairment charge to the carrying value of the LATAM assets was required.

The above refers to a short sell report from Hindenburg Research, whereby they brutally attacked Aphira fro grossly overpaying on their LATAM assets, and the multiple cases of related 3rd-party transactions, an attack that seems. To carry more weight as every day passes.

Aphria was forced to lower their balance sheet valuation on their Latin American assets this quarter. Aphria's previous models were too optimistic about gross margins, EBITDA margins, and how expensive it would be to build up their Latin American assets. When more realistic figures were used, those assets were worth less than their carrying value on Aphria's balance sheets and less than Aphria paid.

Aphria is still carrying $225 million for the LATAM assets, even though the deal was originally announced at $195 million. It was an all-stock deal, though, so share price increases upped that price higher due to strong stock performance in the summer.


"Special Committee concluded review and found that the acquisition of LATAM assets was within an acceptable range, albeit near the top of the range of observable valuation metrics; the Company's investment in LATAM assets is approximately $225 million, after recording the aforementioned non-cash impairment charge, which is approximately $30 million more than the original agreed purchase price of approximately $195 million."


Their earnings then continue with the financial results, and the story went from bad to worse.

  • Net revenue soared from $22 million to $74 million. Looks great on the surface, however, the bulk of this revenue was LOW margin revenue from their CC Pharma acquisition.
  • Their cannabis sales were even worse…they actually fell in the quarter from 3,408.9 kg to 2,636.5 kg (-23%). Recreational cannabis sales fell from 1,947 kg to 1,329 kg (-32%).
  • Their margin dropped from 47% to 18% (that's a 61% decrease QoQ)
  • Costs of goods sold increased and Aurora lost more than twice as much EBITDA from its Canadian cannabis operations.

The top-line revenue here is little more than a distraction since investors in Aphria are not investing because they believe in the growth in the Germany pharmacy distribution business – which is characterised by low margins. They are investing for the growth of the recreational and medicinal markets, and in this area, Aphria failed miserably.

More to that, they are still leaderless, having not replaced ex-CEO Vic Neufeld. In the words of the Chairman and interim CEO, Irwin Simon, "The company is not currently looking for a CEO, and won't be until we feel the company has "stabilised".

Just a shocking set of results, and for the moment, we are on the sidelines having liquidated our remaining position. Related 3rd-party transactions, and "unstable" company, and pathetic execution. Enough is enough.



If you can't beat them…

This week saw iAnthus announce that CBD For Life, a top-ranked, national CBD brand in the U.S. which the Company agreed to acquire on March 29, 2019, has entered into an agreement with Urban Outfitters, a lifestyle-oriented general merchandise and consumer products store.

The agreement places CBD For Life products in Urban Outfitters' e-commerce platform and top 6 retail locations in the U.S. The CBD For Life products are expected to launch in the select Urban Outfitters stores later this month.

Urban Outfitters has 245 stores in North America and Europe, potentially allowing for a broader roll-out if this small roll-out is successful.



Canopy Strengthens its European reach

Canopy Growth has acquired a tiny Spanish company with a 1,600 ft2 greenhouse. Cafina has one of three Spanish licenses to cultivate, distribute and export cannabis containing more than 0.2% of THC for medical and research purposes.

This purchase bolster's Canopy Growth's existing facility in Denmark, although given the relative size of those two facilities – 430,000 ft2 versus 1,600 ft2 – this purchase is likely better-seen as the purchase of a license and perhaps some relationships with the Spanish government.

"This strategic acquisition in a scalable, low-cost production environment diversifies our owned production capabilities in Europe. Adding Cafina will allow us to build out our presence in Spain using its existing cultivation license while ensuring our Canadian footprint – the largest in the world – can continue to serve the medical and recreational needs of Canadians," said Mark Zekulin, Co-CEO, Canopy Growth.

Terms for the deal were not disclosed.



27 and counting

Trulieve this week announced it had opened the doors of its 27th storefront in Florida on Tuesday with a new dispensary in Bonita Springs. Presently, Trulieve operates 26 other dispensaries throughout the state of Florida, including several throughout the South Florida region.

Trulieve recently won its case to have the current Florida cap of 35 dispensaries per company lifted. This puts Trulieve at a massive advantage over its competitors as it can open an additional 14 stores on top of the cap, taking their total number fo potential stores to 47. The undisputed heavy-weight of the Florida market rolls on.



SLANG to enter Washington

Last week, we wrote about a company we feel could eventually become the Coca-Cola of cannabis, SLANG Worldwide. This week, they announced they had entered into an agreement to acquire Arbor Pacific. Founded in 2012, Arbor Pacific, Inc. is a leading producer of branded cannabis products.

Arbor's product portfolio includes a mix of branded offerings that span the Vaporiser, Flower, and CBD product categories. Its Avitas and Hellavated brands are among the highest selling cannabis brands in the Pacific Northwest, with multiple products regularly listed among the top 10 best-selling vape SKUs in Washington state, according to Headset.

These high-performing brands will complement SLANG's existing portfolio which includes a variety of category-leading products sold in multiple other U.S. states.



Arbor products are currently available in more than 200 dispensaries in its home state of Washington, which is estimated to be the third largest cannabis market in the U.S. with US$1.4 billion of total sales in 2019.

Arbor products are also distributed in Oregon, Colorado and Alaska, and it expects to enter the Canadian market by the fall of 2019 through a previously announced licensing agreement with 48North Cannabis Corp.

SLANG intends to use Arbor's supply chain platform to further expand the distribution of the Company's brand portfolio into Washington and other key distribution channels in existing markets. With the addition of Washington, SLANG products would be distributed in 12 U.S. states. SLANG will also pursue opportunities to sell Arbor products throughout is existing distribution network.

"Our team has been thoroughly impressed by Arbor's ability to develop brands that uniquely appeal to consumers in the Pacific Northwest, as well as establish a scalable network of manufacturing and distribution assets across the region," said SLANG co-founder and CEO Peter Miller.

Until next week friends.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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