Weekly Cannabis Report: Don't Expect Big Premiums In M&A

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Includes: ACB, ACRGF, APHA, CGC, CRON, CTST, CURLF, CWBHF, ELLXF, FLWPF, GGBXF, HEXO, HMLSF, HSTRF, IVITF, KHRNF, MEDIF, MJ, MRRCF, OGI, SOLCF, SPRWF, SVVTF, TGODF, TLRY, WSLFF
by: Cornerstone Investments
Summary

Cannabis stocks continued to slide last week as investors seek to de-risk their portfolios following recent market volatility.

2019 Q1 earnings season was underway and both Aurora and Tilray reported results that failed to lift the sector out of its recent slump.

Supreme Cannabis acquired BlissCo in an all-stock deal with no premium which shows a lack of interest for Canadian cannabis assets.

Cannabis, Marijuana, Hemp, Cornerstone Investments

Welcome to our Weekly Cannabis Report, a reliable source for investors to receive the latest developments and analysis in the cannabis sector.

Trading Summary

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.

(Source: Bloomberg)

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)

Industry News

Looking Ahead

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:

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.