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420Investor and New Cannabis Ventures Founder Alan Brochstein shares his take on the winners of Germany’s public tender process for medical cannabis cultivation and distribution licenses. Brochstein notes that the reaction to the news that Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P), Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E), and Wayland Group (CNSX:WAYL) (FRA:75M) (OTCMKTS:MRRCF) were each selected as winners of the public tender process has been muted. He points out that while the deals include relatively small amounts of cannabis, it puts the companies in leadership positions in Germany. Brochstein also analyzes the recent M&A activity in the US and likes Cresco Labs Inc’s (CNSX:CL) (OTCMKTS:CRLBF) acquisition of Origin House (CNSX:OH) (OTCMKTS:ORHOF) (FRA:CY4). Brochstein is pleased Cresco’s recent deals have addressed shortcomings in its US footprint. Cresco recently entered the Florida market with its purchase of VidaCann Ltd, a medical cannabis provider, and now has a California base of operations by acquiring Origin House.
Transcript:
James West: Welcome back. Alan Brochstein’s with me now; he is the chartered financial analyst at Invest420. Alan, how are you today?
Alan Brochstein: I’m doing great. Nice low Friday, James.
James West: It is really slow out there in the marketplace. What’s your take on the action today in the cannabis space?
Alan Brochstein: I’m not seeing a lot of action today, really; I’m seeing a lack of reaction to what I thought was some interesting news out of Germany. You know, it’s a small amount of cannabis on the surface, for sure, but kudos to Maricann, Aurora and Aphria for winning those initial lots.
James West: Right. So give us an update – what happened in Germany?
Alan Brochstein: Well, so Germany’s been delayed and delayed and delayed, and they finally announced initial tenders. Like I said, it’s not a lot of cannabis, but it’s a first step in – you know, I think it puts those three companies in maybe frontrunner position, over time. So we’ll see how it plays out, but definitely at a very minimum, a validation of those three companies. There were apparently 77 bidders.
James West: Right. Huh, well, I guess it is a step in the right direction. Are you surprised by how long this legislation has been delayed in Germany?
Alan Brochstein: Oh, I’m kind of used – I don’t know German politics that well, James, but I’m pretty used to government delays, so no, the answer is no, without knowing a lot.
James West: Right. Okay, so you do think that this is you – you know, is this going to catalyze more momentum in the European Union generally? Or do you think this is going to just result in a, okay, Germany is doing it; let’s wait and see how their experience goes before we move forward?
Alan Brochstein: No, I think Germany really sets the stage. It’s not the only way for companies to get into the EU; you know, Tilray and a few others are in Portugal. You know, Malta is an up-and-coming way to get into the EU. But you know, clearly Germany is going to have production on the ground, and this is a first step for that, and Germany is the largest country, and I think it’s going to be pretty exciting.
There’s some other countries, too, like Denmark, that are already on board. But make no mistake: the European market is huge compared to Canada, let’s say.
James West: Yeah, sure. Well, there’s 502 million residents of the European Union, so when people say to me, which is a common refrain, and they say, Yes, and we’re in California, which is the largest market in the world, I like to say, well, except for the one that’s actually ten times bigger than California, called Europe.
Alan Brochstein: Right. But depends on how you define it, but that’s true.
James West: Sure. In describing a market, you can go regional, you can go national, you can go international, exactly. You can go continental, arguably. Arguably, that would make North America, I think, the most populous continent in terms of – oh, no, it would be Asia. But Asia’s really not making any moves towards cannabis, even though I read a story in the Economist yesterday which, to my surprise, informed me that China is in fact the world’s largest grower of legal hemp.
Alan Brochstein: Yeah, I know. That’s pretty well known, actually, but people don’t like to talk about it. There’s fears about the – quality there, I don’t know. But you know, the big story this week, James, was clearly more M&A in the United States. There was just a few weeks ago that Harvest catalyzed its stock with that out-of-the-blue acquisition of Verano Holdings; this week, Cresco, which had already filled a void in its portfolio by buying a private company in Florida, filled an even larger void, one that remains for other MSOs, and that’s in California. I’m sure your listeners know they’re buying Origin House, which has been one of my favourite stocks for a long time. So I was glad to see that.
James West: Yep. We had, actually, Marc Lustig graced us with his presence the day of, so that was a revelation, and actually, I’ve been spending the last couple of days with a gentleman by the way of Dr. Neilank Jha, and he is the CEO of Green Relief, which is, at this point, is a private Canadian LP. They’re somewhat noteworthy for the fact that they grow their cannabis via aquaponic means, meaning, in the presence of fish who provide the fertilizer.
Alan Brochstein: Right. Yeah.
James West: And it’s an interesting story, because Dr. Jha is a neurosurgeon and a behavioural economist, and he actually sits on a Board that advises, you know, advises globally. He’s one of the worldwide experts in traumatic brain concussions, and so we’ve been having a long conversation about the future of, and the promise of, cannabis for that widening sort of biological, biotech applications.
But so yeah, so very interesting there. So do you think that the, you know, the deal with Cresco and – oh, my point there was that Marc Lustig, the CEO of Origin House, had invested not in Green Relief but in one of the subsidiaries. So we’ll be bringing out coverage of that, and I’ll try to get some time with you. You’re coming up to Toronto for the Benzinga Conference where I think you’re keynoting, aren’t you?
Alan Brochstein: Yeah, I’ll be there, and I’ll be there for 4/20.
James West: Yeah, right, of course! Great, well, I’ll look forward to seeing you then. Now tell me: so this deal with Cresco and Origin House, that was the largest public company transaction in history in the United States, wasn’t it?
Alan Brochstein: Well, no, but for the cannabis space, yeah.
James West: Right. Well, that’s what I meant, sorry. [laughter] You got me there! Okay, so now, do you think that that makes Cresco more attractive as a buy for longer-term investors, at this point?
Alan Brochstein: You know, it’s hard for me to say. These MSOs are really tough. You know, I don’t think investors really know them very well. We haven’t seen a lot of operating history, because most of them just came public. Origin House was obviously a little bit earlier, so people know that story fairly well. I think, you know, anybody that was looking for flaws in Cresco would have probably said they don’t have Florida and they don’t have California, and so now they check those boxes. I mean, I thought before that Cresco was certainly a top contender, and I think this probably validates that even further.
I would just caution, one of the things I’ve been telling my subscribers at 420 Investor, is to just be a little bit careful in the MSO space and be cognizant that a lot of these stocks have very thin floats. And so the momentum traders can get hold of – and I’m not trying to pick on Cresco, necessarily; it performed very well after the acquisition. Harvest did very well after their acquisition, and now they announced a financing.
So just be cognizant of tight floats and the need to raise capital over time, in general. So the bottom line is, you don’t need to chase these stories, in my opinion.
James West: Okay. Do you think that the valuation that Origin got, do you, how would you categorize that? Fair? High? Low?
Alan Brochstein: I was a little disappointed. It wasn’t – my longer-term focus model portfolios, I had – as a CFA, you’re not allowed to use the word ‘promise’, so I never would have used that word, but I basically had told my subscribers to expect a new all-time high, which was achieved just before the deal. But, I was really looking for it to get to $1 billion USD on its own. So I think, you know, Origin House definitely had its pick of the litter, and went with Cresco; I have a feeling, Marc’s a very smart guy. He’s been in the space working very hard for a while, and while I was disappointed, and I told him, with the actual price that he got in terms of 0.8428 shares of Cresco, if you look at the relationship between those stocks, and you know, it’s pretty close to the low. That’s still pretty close to the low.
With that said, I think it says a lot about what Marc Lustig and his team and his Board of Directors must think about Cresco as a partner for the long term. I think having watched Marc for several years now, I don’t think he was ever in this for a short term, so I would say that the disappointing price in the short term, I bet you Marc would say it would be addressed in the long term.
James West: Right. Right, that’s a common refrain we’ve heard, you know. HEXO taking out Newstrike with no premium.
Alan Brochstein: Yeah, I know.
James West: That’s the argument. But I’ve got to think that for the newer investor, it’s just a tremendous disappointment.
Alan Brochstein: Yeah. Well, and I had a position in, I have a model portfolio that’s just focused on LPs, and you know, I saw that. And I’ve been really warming up to HEXO. I mean, people that follow me know, it just hasn’t been one of my favourite stories, but I really liked that deal.
One of the weaknesses in HEXO, and there’s a lot of strengths, but one of the weaknesses in my opinion has been reliance on a single facility, as well as on a single buyer, Quebec. And the HEXO deal – I was, sorry, Newstrike deal – I was never a huge fan of Newstrike, but the stock was very cheap. They’re one of the higher revenue generators, and they have a nice runway. That was a nice deal, and I think anybody following the space should think more highly of HEXO now. They got a great deal, and it was a good strategic fit.
James West: Yeah. Okay, let’s put on our speculation hats now. Who do you think is ripe for either being taken over, or being a consolidator?
Alan Brochstein: On the takeover side, you know, I’ve said for a while – I came out with a while ago, I came out with the list, and three of the names on the list were Emblem, CannTrust and Organigram. Well, Emblem was acquired; I think there might have been a fourth one on there as well. It might have been HEXO, believe it or not.
But at this point in time, I think both Organigram and CannTrust certainly have a viable path forward without being acquired, but I would put them at the top of the list. They’re both leading companies, they’ve proven themselves in many ways, CannTrust’s recent stumble notwithstanding. And the valuations, for anybody looking – any sort of strategic player looking to get into the market, you know, obviously Aurora is still out there, and Tilray, as very large players that don’t yet have those strategic relationships like Cronos and Constellation; but I would think a very large strategic buyer, which could come out of the pharmaceutical industry, you know, might want a lower price tag. So those two have a much lower price tag than their larger peers, and you know, they’re trading cheaper by any number of metrics.
James West: Right. Do you think that Aurora’s share structure is a impediment to their acquisition with a major globalized dance partner, assuming that that’s what they’re after? I suspect, just because I have, you know, a lot of conversations with various elements of management at Aurora on a regular basis, they really give me the impression that they’re not, they’re not out there looking for that big dance partner, per se. They rather like to think that they can go out and attract a wide range of dance partners across a bunch of different sectors, and so they’re not in a hurry.
Certainly they’ve demonstrated ability to access capital on increasingly reasonable terms; that last debt deal was not onerous in terms of dilution, unless, of course, they’re unable to make that big payment in five years. But you know, the whole market could be a very different place in five years. I think within five years we might have already gone through the big consolidation where all of the era of the, you know, the startup that goes from 100 million to a billion in six short weeks – I think that might be in the rearview mirror sooner rather than later, and so companies like Aurora have a better chance. Would you say that that’s in line with where you think, or do you think that we’re still likely to see a lot of high-impact speculations come through?
Alan Brochstein: So Aurora is not paying me to tell them what to do, but I would tell them not to do one of those strategic deals. When I think back to what the alcohol industry’s done since Prohibition was ended, you know, why sell out now? The only problem that companies have, in my opinion, right now, is access to really large amounts of capital. Can you imagine if Aurora wanted to be on the same footing as Canopy Growth – where are they going to get $5 billion? Because everybody’s all excited about the cash, so there would be a lot of dilution to raise that kind of money without any near-term payoff.
But people that invest in Cronos and Canopy, you know, don’t seem to be bothered that they essentially gave up control of the company. So maybe somebody will acquire all of Aurora; I’m certainly not planning on that. I think we’ve seen other types of deals. Tilray and HEXO have done collaboration deals that didn’t involve equity at all, but joint investment, things like that. I would think that the Peltz advisory would not be to necessarily find a strategic buyer, per se; I think that the company line of trying to do lots of deals across multiple industries is probably the smart route to go.
James West: Right. Well, time will tell. There’s, it might be a little quiet today, but I think in the macro picture, it’s a very dynamic market; probably one of the most dynamic markets in the world, currently. All right, Alan, well, I really appreciate the conversation, as usual. I look forward to seeing you in a couple of weeks.
Alan Brochstein: Yeah, first time ever! We’ve never met!
James West: Oh, that’s – no, no, no, I did meet you at the first Benzinga conference, didn’t I?
Alan Brochstein: If you were there. Were you at the first one in Toronto? I don’t think you were there.
James West: I was there for, like, 10 minutes.
Alan Brochstein: Well, now I’m very disappointed. I would remember meeting you.
James West: Yeah, well, actually, that’s right. I do recall that when I was there, so that, where that venue was just down the street from my office. So I ran down to see what the attendance was like, and I remember seeing you on stage, and that was the moment when I realized, oh, Alan Brochstein’s partnered up a bit here with Benzinga. And I was like, that’s interesting! That was my big revelation for the day, but then I had to get back to the office to do this show, so that was that.
Alan Brochstein: Look forward to meeting you this time.
James West: Same, Alan, I look forward to it, too. See you soon.
Alan Brochstein: All right, take care.
James West: Bye-bye. |
