The Anatomy of a Canadian Acquisition – What’s the deal?

There has been a flurry of M&A activity in California from North of the Border in the first six months of 2018. Companies such as CannaRoyalty (4 deals), Nutritional High (2) and High Hampton (2) lead a group of over 15 companies currently hunting in CA. There is a lot of curiosity about the construct of these deals and what they mean so let’s try to clear up some of the misinformation.

One narrative being promoted by some suggests that Canada has boatloads of cash and is using it to buy companies here in CA. But the actual facts suggest otherwise. Let’s first look at the transactions closed or pending with CannaRoyalty, who has announced four deals since Jan 1.

In the four acquisitions, CannaRoyalty spent an aggregate of $86m. Of this total, 58% was paid at close (aka Purchase Price) and the remaining 42% is subject to an earn-out. Interestingly, CannaRoyalty required that the seller take a whopping 96% of their total compensation in stock. So while CannaRoyalty did announce a recent financing that raised CAD $12m ($9m US), they aren’t using it to line the pockets of selling shareholders.

Even more prevalent is the use of a three-prong strategy by Canadian companies to leverage their publically traded currency. First, they invest cash into the seller’s operation to help them scale up. Then, they exchange their currency, stock, to gain a control position in the seller that allows them to consolidate the financials. The final leg of the stool is the earn-out, typically between 2 and 3 years in length and typically represents 40-50% of the transaction value. While these deals are announced as acquisitions, they are truly investments.

And that appeals to a number of California Cannabis companies who are raising capital. Entrepreneurs see it as an opportunity to fund their business while taking a little off the table now with the objective using the investment to drive revenues and liquidity on the second go-round. Of course, the core issue is the liquidity and sustainability of the buyers stock as most employees will be subject to one-year lockups before they can sell. Future liquidity will depend on what the entire Canadian Securities Exchange will look like a couple of years down the road.

So are the Canucks bringing their cash to the US? Yes, but it goes into ops, not founders pockets. For the shareholders to receive real dough, they’ll have to count on selling their stock.

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