Could Wayland Group (CNSX:WAYL) (OTCMKTS:MRRCF) (FRA:75M) be in-line to receive significant multi state operator (MSO) interest down south? Given Green Growth Brands (GGB) C$2.8-billion takeover bid for Aphria Inc.—and other supporting variables—there’s reason to believe it could happen.
When GGB announced their unsolicited bid for Aphria last week, most viewed it as an attempt to acquire an undervalued company mired in a period of vulnerability. Taking advantage of other’s misfortune by stink-bidding your competition is a time-tested maneuver that occasionally leads to successful M&A attempts in the market. By almost every metric, Hindenburg’s report engineered Aphria to “undervalued” levels compared to its peers on a price/sales, future EV/EBITDA, existing supply contracts and you-name-it basis. Stripping out all the controversy, Aphria stacks up very favorably—if peer valuations are your thing.
However, GGB’s takeover bid marked another important milestone that bypassed almost everyone at the time. It became the first major attempt by an American MSO to acquire a Canadian licensed producer. Up until now, all acquisition attempts have either been Canadian-on-Canadian, MSO-on-MSO, or Canadian-on-International (excluding the U.S.). Now that GGB has broken the ice, it seems logical that the cross-border amalgamations will begin to fly.
9/ RE: MSO's:
1. institutional demand on horizon (banking reform).
2. End-products + addressable market = HUGE upside.
3. Valuations discounted vs. ???????? players.
4. Expect cross-border marriages ????
5. Revs *first* come online this year = long-tail.
— Todd Harrison (@todd_harrison) January 3, 2019
Alan Brochstein recently appeared on Midas Letter RAW to convey this very fact. Besides expressing his belief that Canadian LPs and U.S. MSO would begin to “hook up” via merger, Mr. Brochstein also revealed that another U.S. MSO “tried to put in a bid for Aphria.” Watch.
Alan Brochstein of 420Investor on Midas Letter RAW gives his cannabis predictions for 2019
If we accept that GGB has kick-started an unalterable trend of cross-border merger activity, Wayland Group should certainly receive viable acquisition interest. The company’s general situation roughly resembles that of Aphria in several respects.
We all know about Wayland’s previous news cycle hardships that crushed its burgeoning momentum last February. Although real negative circumstances fueled the cascading price action (beyond a short seller report) then, many believe Wayland Group has remained “undervalued” in relation to its balance sheet assets—similar to investor’s perceptions of Aphria today. Its stock has yet to recover, 10-months after their $70M bought deal fell through.
Furthermore, both Aphria and Wayland Group (to a lesser degree) have substantial domestic production capabilities, brands and international footprints MSOs could covet. With MSOs spending investment dollars domestically to build-out American operations, there’s been little time or inclination to focus abroad. At some point, that will change as available licenses dry up and competitors vie to become the first to expand abroad. To date, there’s still no MSO operator with a significant international footprint.
MSOs can change this dynamic by acquiring local assets and building organically; or they can jump in head-first by acquiring a “value” company like Wayland Group. With ‘hockey stick’ growth about to befell the sector, pulling the trigger on instant international access might be too tempting to pass up.
Keep in mind that among all Canadian LPs with broad international exposure, Wayland Group is the only one trading on the Canadian Stock Exchange. That sidesteps the issue of shares having to de-list from senior exchanges (TSX, NYSE, NASDAQ) to trade down to a junior listing. Most funds and investment pools are forbidden to hold significant positions in companies trading on junior exchanges.
Finally, Wayland Group is known to be shopping assets, making them potentially amenable to the right MSO offer. On December 19th, the company announced that its Board of Directors has initiated a process to explore strategic alternatives, including, but not limited to assessing the potential spin-out and/or European listing of its international assets. The goal is to unlock value in the company non-domestic asset portfolio. While siphoning or spinning-out off pieces is the primary goal, it’s hard to imagine the company won’t listen to juicy sum-of-the-part offers, should they become available.
Whatever becomes of GGB’s unsolicited all-stock bid for Aphria, the former may have inadvertently commenced a cross-border consolidation trend pitting Canadian LPs and U.S. MSOs as dance partners. The big question is whether MSOs are primarily seeking Canadian-based assets, or longer-cycle international assets where markets are generally more nascent. Either way, Wayland Group holds irons in both fires, with international assets far more substantial than anyone near its market cap range.
For those reasons, I’d be very surprised if Wayland Group isn’t receiving attention—or imminent attention—from MSOs looking to expand footprints beyond the homeland. Unlike larger Canadian LPs, it’s a realistic and digestible target many could seemingly wrap their hands around.
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