As CannTrust Holdings Inc. (NYSE:CTST)(TSX:TRST) awaits federal enforcement action for growing cannabis illegally, the embattled company has been weighing its options — including a possible sale. Failing that, its assets could become prize possessions for other pot companies that may be able to scoop them up at bargain-basement prices should Health Canada come down hard on CannTrust and revoke its selling and growing licences.
While rival pot firms keep their eyes on the fate of CannTrust, Aphria Inc. (NYSE:APHA)(TSX:APHA) interim CEO Irwin Simon recently said the Ontario-based company is “absolutely” interested in acquiring its troubled competitor’s valued assets.
I think they have some great medical clients and they have some real interesting assets. As somebody that looks for opportunities all the time, it’s something that absolutely we would be looking at.
Before CannTrust hired financial advisers from investment bank Greenhill to explore a possible sale, rumours swirled several companies were mulling the idea of a CannTrust takeover, while one reportedly contacted Health Canada to see if a deal could help salvage the beleaguered company’s licences.
Whether Aphria, which recently posted a surprising Q4 profit last week, was one of the rumoured firms interested is unknown. However, Simon did echo the sentiments from analysts about a potential sale of CannTrust and how its pot production scandal has affected the industry.
“At the end of the day, Health Canada needs to go out and figure out what happened,” he told BNN Bloomberg Friday. “From trust with investors and trust with consumers. We have to make sure consumers trust brands and the company. What happened at CannTrust wasn’t good for the industry and absolutely not good for CannTrust
CannTrust’s regulatory fiasco has created a fragile environment for the industry and investors are looking closer at companies to see which one might be next to land into trouble with regulators.
CannTrust assets could bolster another company’s value
Even if CannTrust avoids having its production and sales licences cancelled, the trust Simon talks about will take a long time for the company to earn back with investors. CannTrust also revealed last week the it is being investigated by the Ontario Securities Commission and RCMP over its illegal production scandal, and it will likely miss the Aug. 14 filing deadline for its latest financial report.
With more than $500 million of CannTrust’s market value being wiped out since the regulator breach was announced July 8, it will be an uphill battle to try and get new or old investors convinced to buy shares.
But if another company, like Aphria, gets their hands on CannTrust’s assets, they would be under new management and could increase a company’s value and strengthen its position. Although new licenses may need to be obtained, being able to add capacity and sales is always highly coveted in the industry.
That’s part of the reason why it wouldn’t be surprising for an acquisition to take place if CannTrust’s share price continues to fall. At a market cap of around $425 million, it’s still trading above its book value, but not by much. But if Aphria or another company were to wait for CannTrust to lose its license before making a bid, assuming that in fact happens, it may find itself in more competition with rival cannabis companies looking to score a deal as well.
By jumping the gun before Health Canada’s decision takes place, a company might overpay somewhat for the assets, but in the long run it could pay off through greater market share. For now, however, there’s no indication that an offer is around the corner.