Winners and Losers From Today’s ACB-LEAF Merger: TGOD, CannTrust Holdings Inc, The Hydropothecary Corporation

Benjamin A. Smith
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The Green Organic Dutchman Holdings Ltd. (TGOD) could be a big beneficiary from today’s Aurora Cannabis-MedReleaf merger agreement—without having to lift a finger. But they aren’t the only players who will be positive (or negatively) impacted in such a scenario. We summarize our top winners and losers from today’s bombshell announcement, in no particular order.

Winner: The Green Organic Dutchman (TGOD)

Should the deal ultimately get consummated, the defacto benefits to TGOD could be profound.

For starters, TGOD’s business model is mainly catered to the growing pharma-grade organic cannabis. This makes MedReleaf Corp. a theoretically natural off-take partner, as both companies prioritize products which are laboratory tested to ensure standardized, safe and consistent products. This includes CBD oil, where MedReleaf develops and brands its own version of softgels.

The Green Organic Dutchman could also obtain operational intelligence from MedReleaf, who is among the highest-yielding and lowest cost producers around. Aurora Cannabis Inc. slated on the merger press release it stood to gain productivity and cost benefits from MedReleaf’s high-yield cultivation practices. By association, this knowledge should filter through to TGOD, by proxy of Aurora’s $78 million investment and election of Chief Corporate Officer Cam Battley to the TGOD Board of Directors.

Another thing to keep in mind in developmental overlap. Like MedReleaf, TGOD has significant interests in CBD oil extraction and genetics & breeding. Of course, MedReleaf is renowned for developing some of the most prestigious medicinal strains in the industry. Post-merger, one imagines TGOD will have plenty of access to the MedReleaf’s R&D team, and perhaps much more. With TGOD’s business model geared towards commanding a premium price in the marketplace, having top-echelon strains in paramount to their success. They are not in the business of volume growing.

Ultimately, as Aurora Cannabis becomes the clear medicinal product maker, volumes should steadily increase over time. Given the probable unification of Aurora and MedReleaf, its not hard to envision The Green Organic Dutchman becoming further entangled in the operational structure of both entities. To what scope remains to be seen, but Aurora getting bigger can only mean positives for TGOD along the way.

Winner: CannTrust Holdings (TSE:TRST)

CannTrust Holdings Inc. has been on quite the roll, and today’s merger news only reinforces that dynamic. Shares in the well-established medicinal cannabis player increased $0.58 to $10.00/share even (↑6.16%). This continues a string of gains which has seen the stock rise ↑45.32% since May 3rd.

More than the singularity of today’s gains, with MedReleaf officially taken out, CannTrust becomes the clear #1 prime asset in the lucrative medicinal market. With Aurora Cannabis establishing outright dominance, the odds of another suitor making an offer increase—and this should put a floor under the share price. The stock hasn’t been rising on a multi-day basis without reason.

Winner: The Hydropothecary Corporation (CVE:THCX)

In much the same way as CannTrust, The Hydropothecary Corporation becomes one of the more attractive takeover on the open market. As we’ve explained recently, THCX had been appreciating on the view that it could be a takeover target—especially as Big Cannabis attempts to maintain scale with one another. With MedReleaf off the list, the odds of a competing offer will presumably grow.

That may not be the ambitions of CEO Sebastien St. Louis, who’s on record expressing his hope that the Board of Directors will keep the company independent. But it’s remains a possibility nonetheless.

https://www.youtube.com/watch?v=CYs2RLx8Cho

Loser: Short-Term Focused “Investors” In Aurora Cannabis

While top-line deal details appear great, there’s no mistaking the fact that Aurora has brought dilution to a whole new level. With a current outstanding share balance of 561,006,914, and with MedReleaf shareholders poised to receive 3.575 common shares of Aurora, the end result will be a float somewhere north of 900 million shares o/s. For an industry where 90% of participants are within the 100-225 million shares outstanding level, a considerable about of digestion will take place.

Such a scenario isn’t generally favorable for investors in the short term. It creates pressure from existing shareholders by promoting rotation into other equities with less constraint. It also creates a less visibility on the business operations side and with corporate earnings.

Perhaps Aurora Cannabis will buck the trend this time, but we doubt it’s much of a concern. This moves is definitely geared towards rewarding patient, long-term shareholders, by exercising investor capital now to guarantee themselves a seat at the head table. It’s a strategic wager, and one that will likely prove prescient and forward-thinking. But if you’re looking to cash out in the next thee or six months, this wasn’t the deal for you.

Winner And Loser: Canopy Growth Corp (TSE:WEED)

Many Canopy investors this morning are breathing a sigh of relieve that the company did not make a play for MedReleaf. It’s hard to blame them: most people are focused on short term results, and rather someone else take on the accompanying dilution for themselves. Fair enough. Nobody who invests for the now wants a wet blanket thrown on their share price.

But the deal also catapults Aurora ahead in the  renumerative medical market. Although Canopy Growth is still considered the crème de la crème all-purpose LP, they can’t claim to be the scale leader in key areas of the market. How much impact this has on Canopy—which is a masterful and strategic operator—remains unknown. But when you’re chief competition makes a sizable play for your market share, it has to warrant attention.

With that said, Canopy Growth has plenty of options to do whatever it wants. While Aurora will almost assuredly be constricted with which moves in can make in the intermediate future, Canopy has no such dilemma. It can decide to grow incrementally and judiciously like it has done; or it can choose to splurge on a more cost-effective asset of its own (see TRST and THCX). Ultimately, whatever it does Canopy will remain the leader (or co-leader) in the space.

And more impressively, they’ve done it all without breaking the bank.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

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