Liberty Leaf (LIB.C) came screaming out of nothingness this past week, emerging from the ashes of Weststar Resources and claiming a nice big chunk of the burgeoning marijuana investor market, considering it had no news.
Liberty had a Health Canada licensed producer applicant under its wing, but so too do about 1500 random Canadians with a hope and a dream. So why the jump?
Well, everything marijuana is jumping right now, including companies with no story at all, but the general rise in share price has allowed a lot of those to finance themselves right into actual opportunities. Calyx Bio-Ventures (CYX.V), as an example, was languishing at $0.015 for months before this new sector rise shot it to a high enough rate to get money in the door and close a nice deal. Now there’s some ‘there’ there.
Liberty Leaf’s jump will also help the company greatly, but in ways that only became clear this morning, when LIB put news out.
The news? That they’ve got their hooks into a California company with six dispensaries, four grow houses and a boatload of doctors at the helm.
Granted, the news was that the company has signed an MOU, which is a long way from an LOI, let alone a completed deal. Charlize Theron could sign an MOU that she thinks I’m hot, but it wouldn’t compel her to slide a hotel room key across the bar at me, or make out under the pool table, or even buy me a sarsaparilla.
Granted, I’m probably thinking about Charlize Theron too much these days, but anyway..
The details of this deal warrant exploration, because if you look at comparables, making this deal definitive would put Liberty Leaf at a valuation that is bonkers.
Maple Leaf Green World (MGW.V) has a leaseback deal on a California grow and so little money that it had to do a shares for debt settlement recently. Their market cap, however, is $84 million based on having a piece of one growhouse that has managed a harvest and a half.
Liberty Leaf has its mitts into a company, Cannabis Botanical Group (CBG) that, as I understand it, is led by a team that has been in the California medical marijuana sector for the last five years, has six dispensaries (four of them medicinal), and four growhouses, all producing. Also into the deal – CBG’s California distribution license.
How much will it cost to lock this down? That I do not know, but the principals tell me they’re moving through due diligence quickly and will be looking to tamp it down ASAP.
The deal has brought questions out there on the messageboards, some of which I can answer.
Some have wondered how LIB can take a piece of the California pie without being a local company. Right now, as I understand it, if your company is dealing in the medicinal space (as opposed to the recreational, that is gearing up now with a referendum coming Nov. 8), outside entities are allowed to legally own a piece of a licensee. That’ll mean, likely, that any deal will include the four medical dispensaries and not the two that are in a grey area – if the referendum fails. If it passes, chances are the laws will quickly change, allowing all six to be included.
The grow houses are, again as I understand it (and I’m working on third hand info here), licensed medicinal, which allows LIB to get in without the funkiness of a leaseback deal (Translated: A leaseback is where a company isn’t allowed to invest locally, so they build the facility for a cash-strapped local licensee and charge rent, training and consulting fees that will miraculously all but equal future sales).
The other question is, if this company was doing alright, why would it want some Canadian shell to come in and take a piece?
Several reasons for this:
- Growth capital. Legal or not, recreational or not, licensed or not, it’s still tough for a weed company to get its hands on cash for expansion in the US right now. In fact, just keeping a bank account is tough for some. The Canadian public markets are well capitalized and a solid raise for CBG’s growth plans would be fairly easy once the deal closes.
- Canadian connections. When the rules do change and Canada opens up and the US opens up, there’ll be opportunities on both sides of the border that these guys will want to take part in.
- The Great Canadian Weed Splooge of 2016: Let’s face it, cannabis companies right now in Canada are getting crazy valuations, and it’d be remiss of CBG to let that pass without doing a big money deal that sees millions of shares end up in their bank account.
Devil’s advocate time: The deal is not a deal yet. It’s an MOU. But it’s an MOU with a company that has a real long term presence in California, at a time when the California weed vote is about to happen, followed by a likely Democrat Presidential victory. That’s a recipe for an upwardly mobile stock, IMO, especially when LIB’s current share price is among the cheaper available in the space.
I don’t think MGW is worth $80 million. But I know the current $17 million cap on LIB (CSE says there’s 68 million shares out, though corroborating information is tough to find because nobody seems to be able to update their financial data inside a week these days, apparently) is undervalued, compared to what else is out there.
I’m conflicted: I just signed a consulting deal with the company and own a chunk of stock, so by all means go do your own due diligence and rip it to shreds if you think it’s merited. But I think it has good bones. I’m long.
— Chris Parry