M&A Updates: Harvest One/Delivra Is A Good Looking Nano-Cap Cannabis Merger

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Includes: DLRVF, HRVOF, SDIPF
by: Special Situation Investor
Summary

Harvest One is acquiring Delivra in an all stock deal.

The acquisition looks good and should close shortly after shareholder approval, but there is a problem with a borrow on IB.

Sports Direct has increased the stake in Findel and triggered a mandatory offer, which was rejected.

Harvest One (OTCPK:HRVOF) - Delivra (OTC:DLRVF)

Spread: 10% (no borrow on IB)

This is another deal in the Canadian cannabis industry. The transaction is very small (C$19m) and the consideration stands at 0.595 Harvest One shares per one Delivra Share (11% premium to the unaffected price). Both boards have already approved the merger and the shareholders meeting is set to happen in two months. The approval of two thirds is needed and so far 29% of the shareholders have agreed to support. It seems that regulatory consent will not be an issue, however a deal in this industry always comes with the according level of risk. Closing is expected in this quarter.

Harvest One is a holding company, which is collects various cannabis brands under its name. So far they have made these acquisitions:

  • 2018/11 - for about C$5m acquired an Isreali based Phytotech.

  • 2018/10 - for C$1.7m acquired 20% stake in a privately held Burb Cannabis.

  • 2018/05 - for C$34m bought Dream Water.

  • 2018/04 - have bought United Greeneries and Satipharm.

So the management has some experience with the merger and the current transaction is not even their biggest one so far.

Delivra is a small unprofitable company that under the LivRelief brand manufactures and sells creams for muscle pain, nerve pain etc. In the press release Harvest One has commented that this acquisition will also “will position Harvest One well when cannabis-infused products are legalized in Canada, which is expected in the fall of 2019.”. Delivra will have a 13.4% stake in a combined company.

So far Harvest has provided the target with a C$250k loan and the companies have also entered into another C$250k services agreement upon which Delivra will provide the buyer with the certain product formulations.

I’ve not been able to find anything on Delivra’s shareholders, however so far this situation looks good and should close shortly after the shareholder’s vote in May.

Sports Direct (OTCPK:SDIPF) - Findel (FLD)

This is an interesting situation in UK that might be worth keeping an eye on. Last week sports equipment retail giant Sports Direct has increased their stake in online shopping company Findel from 29.9% to 36.8% at 161p/share (a slight discount to the market price of 162p). According to UK law, this move has triggered a mandatory offer at the same price. The stock has initially jumped up to 175p reflecting that the market's and expectations of a higher bid. Findel’s board has rejected the offer as undervaluing and the shares have fallen down a little to the current 155p (4% discount to the offer). So far there has been no further updates on this situation.

Sports Direct has started to invest in Findel since September 2015 (trading at about 180p) - has acquired 19% stake and also unsuccessfully tried to put their member on Findel’s board. In 2016 their holding was increased to 29.97%. It seems that Sports Direct is mostly interested in Findel largest company Express Gifts: last year both companies have made arrangements to launch Sports Direct brands on Express’ platform, which apparently has proved to be successful and the companies, as stated in the mandatory offer document, “have further developed the commercial supply arrangements”.

So what do we have now? One thing is that given how interested Sports Direct is in the company, the raise here is quite possible. Also, since the management has expressed that they think the company is worth much more, it might bring some confidence to the investors, which will reflect in the share price. However both of these points are moot. What makes more sense to me is that a certain shareholder - City Financial Absolute Equity Fund has sold a considerable chunk of shares for 161p meaning that they think this is a good price to sell. Therefore this might also explain why company’s shares have now fallen below the offer price now. I am not sure how much more it can drop since FDL is already very near 2 year lows, but unless you are playing on the increased offer, this might be a good opportunity for a short term put trade.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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