Week 5

Update for Cannabis Industry between December 15th and December 19th.

Canopy Growth have entered into an arrangement agreement where they will acquire MTL Cannabis for approximately 125M CAD$ in form of 0.144 paid in cash to MTL holders and with 0.32 of a common share of Canopy Growth. As of right now the intrinsic value that MTL shareholders get would be around 0.79 CAD$ a share.

From the Valuation point of view, Canopy is paying around 6x on MTL's Adjusted EBITDA or 1.25x on MTL's Gross revenue. I believe that it is a bit on a pricey side if it was a private company, but given it is a public one it makes sense to pay a premium. As a rule of thumb, the premium usually represents about 30%. If MTL was traded off exchange, it would of been around a 5x on MTL's Adjusted EBITDA which makes sense as that is the industry average. It is good to know that MTL's enterprise value is sitting at 179M CAD$ which means that Canopy Growth is getting a huge discount on the deal itself.

Also, MTL Cannabis has an important load of Leases which Canopy will have to deal with and the new debt that they raised worth around 16M CAD$ this quarter. Given that both companies have negative cash flows, it is quiet worrying and could lead to something similar that Simply Solventless Concentrates is experiencing (money crunch). My guess, they hope for a short turn return that would make them survive given new SKUs they have access to with new infrastructure, but they need to react quickly.

For the synergies and reasons why it was acquired can be read on their official website as this is not something I cover as I believe I do not have enough insight on Cannabis industry yet to give some worth of value.

Worth noting that MTL Cannabis transaction was handled/advised by Centurion One Capital.

This week, President Trump, on December 18, have reclassified cannabis from Schedule I to Schedule III which means in simple words that Cannabis is no more seen as a dangerous drug from federal point of view. On Schedule I we would usually find really hard drugs, while Schedule III is more like Tylenol and other soft medical drugs. This means that there will be less restrictions on Cannabis circulation in the country and companies will have a bit more freedom and hopefully less Excise Tax. Important to note that this does not mean that it is legalized for recreational use yet.

These news allowed all Cannabis companies in United States like Canopy as example, to gain over 30% equity value overnight.