Mark Lucas, Managing Director of NZX-listed medicinal cannabis producer Cannasouth, on harvesting his company’s first commercial crop in June 2022. Video/Cannasouth Bioscience LimitedPLUS
The risks associated with medical marijuana businesses have come to light, with documents revealing that the capital-intensive industry is prone to international competition and possible takeovers.
A report assessing the merger project between Cannasouth and Eqalis for $48.8 million, said the two companies faced significant risks, with the listed company Cannasouth needing significant capital to be able to carry out its plans.
“Better access to short-term capital is likely to offer a better prospect of survival in a high-burnout, capital-constrained environment.” Investment bank Armillary Private Capital said in the report.
Key risks that could each reduce the value of the combined entity by approximately $2.5 million included Cannasouth’s one-year delay in manufacturing certification or non-flowering or contamination of its marijuana crops. .
A “significant threat” was if the price of the flower dropped, according to the report. If prices fell 20%, it could erase $7.4 million from Cannasouth’s value.
“Increased competition, both domestically and internationally, can be expected to put downward pressure on flower prices, exposing Cannasouth to a significant threat.”
The report also revealed that Cannaosuth was considering selling its pharmaceutical manufacturing and packaging plant in Hawke’s Bay, called Midwest Pharmaceutics.
Eqalis had its own certified marijuana manufacturing and extraction facility in Katikati. Although the company was pre-revenue and its value was built on planned volumes that may not be fully realized, the report said.
It had raised capital seven times since 2019, with the last round in August last year valuing it at $39.3 million.
The merger proposal was for Cannasouth to acquire all the shares of Bay of Plenty-based Eqalis for $48.8 million, although Armillary valued it at $43 million.
The report said the two companies were likely overvalued and that in the event of a merger, they could lead to higher share price, but not long-term value, as the regulatory environment and the global market for medical marijuana were ripening.
Regulatory approval was required and should be received by mid-March.
Ultimately, a merger would benefit both cannabis companies and make it ripe for a takeover bid, according to the report.
“The merger offers a significant opportunity to build brand awareness, attract strategic investors, deliver positive good news and attract analyst coverage.
“It is also likely that the merged entity will be more attractive to an industry takeover as there will be greater diversity of offers to attract a buyer for all or part of the business.”