Canopy Growth (CGC.T) to take out Mettrum (MT.V) in $430m mega weed deal

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Okay, stream of consciousness time here. What in the hell just happened?

You can talk all you want about whether the existing cannabis company valuations seen in the Canadian markets make sense or not, but Canopy Growth Corp (CGC.T) announced today that they absolutely believe in their market cap, with a $430 million all-stock deal to take over competitors Mettrum (MT.V).

The markets didn’t punish or reward CGC with a big share price shift on the news, and MT stock jumped only as much as you’d expect, which would indicate the investor base in the cannabis space feels the status quo on valuations is merited.

Under the terms of the agreement, Mettrum shareholders will be entitled to receive 0.7132 common share of Canopy Growth for each common share of Mettrum, representing consideration of $8.42 per Mettrum share based on the closing price of CGC.T on Nov. 30, 2016.

First and foremost in the minds of Mettrum shareholders will need to be whether they consider the value of Canopy stock to be fair or inflated right now, considering the big price spikes seen last week when it moved as high as $13, and the sustained short selling efforts that brought it down to $8 subsequently.

General consensus is the market is bubbled out right now, from top to bottom, so why would Canopy make this move, now, today, at bubble prices?

I’ve had several conversations this morning with smart guys with lots of market history, and nobody has a joint consensus on whether the deal makes sense, or whether it’s part of a grander strategy.

There are some who feel the oncoming recreational cannabis rules are behind the move, and that maybe Canopy has some insight into what those rules will look like, with expansion sooner rather than later making sense.

There’s an alternate belief shared by some that Canopy is looking to solidify current market valuations by making this deal happen at this price, perhaps in expectation that the shift to recreational will open them to a Big Tobacco or Big Pharma (or Big Pharmacy or Big Liquor) take out. By making a deal at these prices, they’ll have established that as a fair market base, making a bubble pop less likely.

The fact that both companies are at bubble prices, and that there’s no cash involved, means even if the industry slipped some and those valuations dropped, nobody is getting creamed on the deal. That only happens if Canopy were to suffer another big price drop, which seems less likely if they’re adding a competitor under the umbrella.

The acquisition is massive in scope, at least for this nascent industry, in that it will create a diversified cannabis company with six licensed facilities and a production footprint of 665k sq. feet, with acreage for expansion tossed in.

The details of the deal:

  • Canopy Growth will add a known national brand to its portfolio
  • Canopy says it brings them a full-spectrum product offering, including expansion of medically focused and lifestyle brands and the addition of a natural hemp brand
  • Canopy will add experienced management from the MT side to its roster
  • Post-acquisition, Canopy will fortify its position as the largest medical marijuana company in Canada and as a global leader

Canopy says the deal will fill out their shelves with more niches, in that it will combine Mettrum’s Spectrum brand with the medically focused Bedrocan division and the lifestyle-focused Tweed offerings.

On the hemp side of the business, the integration of Mettrum Originals with Canopy Growth’s recently acquired hemp website platform will solidify Canopy Growth’s position in the hemp market, and there’ll obviously be cost and revenue synergies in supply chain management, back-office, and cross promotional opportunities.

Canopy has also let on that it’s sitting on a combined $68 million in cash after the deal, as it’s using only stock and not doughbucks to make the union happen.

There’s another issue to consider here, and that’s Mettrum’s current product recall situation with Health Canada.

“[Mettrum] is voluntarily recalling medical cannabis products that were exposed to a foliar plant spray that contained traces of an ingredient – a natural pesticide widely used in agriculture – that was not disclosed by the third-party manufacturer on the list of ingredients, or in the product Material Safety Data Sheet/ […] While the ingredient is not harmful and there is no negative effect on product quality and safety, we are doing everything possible to ensure client satisfaction and confidence is upheld.”

“Mettrum sourced the foliar spray from a third-party supplier and used it on cannabis plants when needed. The spray [was] reviewed by Mettrum’s science team prior to use. […] Following a routine Health Canada inspection, it was brought to Mettrum’s attention that this third-party foliar spray contains an unlisted ingredient called pyrethrin. This plant-based insecticide is approved and widely used on both organic and conventional crops in Canada, however it is not currently registered for use on medical cannabis under the Pest Control Products Act.”

To be sure, this was a blip on Mettrum’s radar and not a company-killer, just as Aphria’s veterans affairs scandal is something they’ve decided to ignore and move on from. But it also may have been a tipping point for Canopy, a chance to go in on a company when it’s struggling to maintain.

Says Canopy, “Mettrum will continue to lead site activities with Health Canada as it fulfills its obligations for products affected by the previously announced Type 3 recall. […] The company is confident that Mettrum’s response to the events that led to the recall will result in operational practices that will advance the quality and standards of the production of cannabis at Mettrum’s facilities.”

The deal brings 45 strains under the Canopy canopy, and will require half of Canopy shareholders to ratify the issuance of the shares to make it happen, with 2/3 of Mettrum shareholders needed on their end to vote that they like it.

Both boards of directors approve of the deal. The only question now is, will the shareholders?

And looking at a lot of the messageboard scuttlebutt this morning, that may take some work.

On the current value of CGC stock, the deal values Mettrum at $8.42, well up from today’s $7.48 (which is in itself up 26% on the day). If you believe CGC value will hold, it’s a gimme.

–Chris Parry

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