Welcome to our Weekly Cannabis Report, a reliable source for investors to receive the latest developments and analysis in the cannabis sector.
Cannabis stocks continued to slide last week as the broader market continues to be dominated by trade headlines. The Horizons Marijuana Life Sciences Index ETF (OTC:HMLSF) dropped 1.4% and the ETFMG Alternative Harvest ETF (MJ) dropped 1.8%. U.S.-focused Horizons U.S. Marijuana Index ETF lost another 3.1%, extending its recent underperformance.
Canadian Large-Cap: Aurora Cannabis (ACB) rose 4% after reporting a solid quarter. Canopy (CGC) dropped 6% after its Acreage deal faced oppositions from the certain Acreage shareholders. Cronos (CRON) and Tilray (TLRY) both dropped after reporting muted quarterly results recently.
Canadian Mid-Cap: Aphria (APHA) dropped 5% after several key management changes. HEXO (HEXO) was lower by 3% without news. OrganiGram (OTCQX:OGRMF) rose another 12% after announcing that it will begin trading on the Nasdaq on May 21 under the ticker "OGI". CannTrust (CTST) rose 3% after a brutal period of heavy losses. Green Organic Dutchman (OTCQX:TGODF) lost 2% after a forgettable quarter.
Canadian Small-Cap: Wayland (OTCQB:MRRCF) continues to be suspended under an OSC trading restriction. MediPharm (OTCQB:MEDIF) jumped another 13% after announcing a multi-year C$30 million private label sale and extraction tolling agreement with Cronos. Westleaf (otcqb:WSLFF) dropped another 22%, bringing its total loss to 85% in the last three months. Invictus MD (otcqx:IVITF) dropped 8% after walking back its previously announced plan for Nasdaq listing. Supreme (otcqx:SPRWF) dropped 9% after announcing the acquisition of cannabis oil producer BlissCo (otcqb:HSTRF).
(Source: Author, based on public data)
U.S. Large-Cap: Curaleaf (OTCQX:CURLF) slumped 13% after strong gains in the last few months. Acreage Holdings (OTCQB:ACRGF) continued to slide and now trades well below the implied Canopy offer price. Green Growth (OTCQB:GGBXF) dropped 8% after selling $45.5 million convertible debentures at C$7.0 conversion price. Charlotte's Web (OTCQX:CWBHF) rebounded 2% after it slumped 22% the prior week due to a C$140 million stock sale.
U.S. Small-Cap and International: TILT Holdings (OTCQB:SVVTF) dropped 15% in the aftermath of a half billion dollar write-down and CEO departure. Khiron Life Sciences' (OTCQB:KHRNF) shares held strong despite selling shares at C$2.90 recently. Australian CBD company Elixinol (OTCQX:ELLXF) rose 14% and we recently initiated coverage with a positive outlook.
(Source: Author, based on public data)
- Aurora Cannabis announced fiscal 2019 Q3 results where quarterly revenue increased 20% to C$65 million while production grew 99%.
- Tilray announced 2019 Q1 results where revenue grew 48% QoQ to $23 million while gross margin remains depressed at 23%.
- MediPharm announced a large multi-year oil sales agreement with Cronos including C$30 million of private label oil products (up to C$60 million over 24 months) and a 2-year processing tolling agreement.
- The Green Organic Dutchman received government approval to begin planting at the second of three buildings at its Hamilton facility.
- The German government imported 750 kg of cannabis during Q1 2019 which indicates an annual demand of 3,000 kg, a reality check that shows the small size of this market for Canadian cannabis firms.
- The Flowr Corp. (otcpk:FLWPF) announced 2019 Q1 results with revenue of only C$1.6 million from selling 211 kg of cannabis.
- SOL Global (OTCQB:SOLCF) acquired California-based ECN Inc. for $120 million and a portfolio of six California dispensaries for $17 million.
- Supreme announced the acquisition of BlissCo for C$48 million in shares to expand its cannabis oil and topical offerings.
- New Jersey is dropping its current legalization efforts but would instead seek to hold a referendum in November 2020.
- Invictus MD announced that it is dropping its previously announced plans to apply for a Nasdaq listing and described it as "premature".
Those days are long gone when cannabis companies would pay big premiums to acquire each other using their inflated stocks. We tend to think of Aurora's deal to acquire CanniMed as the beginning of an M&A bonanza that recently extended to the U.S. market as well. However, we noticed that recent acquisitions in the Canadian market were done with noticeably low premiums and, in some cases, the deals were done at-market or without any significant premiums. Notable deals in the Canadian market include:
- In December 2018, Aleafia (OTCQX:ALEAF) acquired Emblem for 27% premium at the announcement, but it narrowed to less than 10% two weeks after.
- In March 2019, HEXO acquired Newstrike at a 10% premium based on unaffected share prices in an all-stock deal.
The latest Canadian cannabis M&A deal happened last week when Supreme announced that it will buy BlissCo in an all-stock deal valued at C$48 million. The deal will combine BlissCo's focus on cannabis extraction products with Supreme's high-quality cannabis cultivation assets. We think the deal makes strategic sense as Supreme had to rely on third-party extractors in the past. However, the lack of premium in this deal is also interesting and reflects the current state of the Canadian cannabis M&A market. Supreme paid 0.24 of its own shares for each BlissCo share, which actually works out to be a 3% discount to BlissCo's own share price based on closing prices on May 15, the day before the deal was announced.
(Source: TSX | BlissCo share price)
We think the Canadian cannabis market has entered a period of stagnation whereby consumer demand has significantly trailed most management and analysts' estimates while companies overbuilt capacities that will enter the market in the next 12-24 months. As a result, we think the demand for Canadian assets is very low and few players would be willing to pay large premiums in a deal. Furthermore, investors are becoming increasingly critical of companies that issue shares for acquisitions causing serious dilution for existing shareholders. Aurora Cannabis was infamous for the all-stock deals that saddled it with over one billion in shares outstanding. As a result, we think investors should expect low-premium or no-premium deals to become the norm in the Canadian market going forward. Even a non-distressed asset like BlissCo couldn't fetch much premium from a strategic buyer like Supreme, not to mention other companies that are hoping to be bought out by the big players before they face tougher competition.
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.