Marijuana Merger: Cash-Burning Companies Might Be Smoked By Competition!
Documents show that the capital-intensive marijuana industry is vulnerable to foreign competition and future takeovers, indicating risks for enterprises involved in the sector. A report analyzing the proposed $48.8 million merger between Cannasouth and Eqalis found that both businesses faced major risks, with the listed firm Cannasouth needing substantial resources to be able to carry out its ambitions.
In a high burn rate and capital-constrained scenario, “more access to money in the short term is likely to provide a better chance of survival.” According to the study from the investment firm Armillary Private Capital.
Cannasouth’s manufacturing certification being delayed by one year, its marijuana crops failing to blossom, or being tainted, are all significant risks that might affect the value of the merged firm by around $2.5m.
The decline in flower prices was labeled as a “serious threat” in the research. Cannasouth’s worth may be reduced by $7.3m if prices fell by 20%. Cannasouth faces a serious threat due to the lowering of lower prices as a result of increased domestic and foreign competition.
The article also disclosed that Cannasouth was contemplating divesting its Midwest Pharmaceutics factory in Hawke’s Bay. In Katikati, Eqalis had its own licensed marijuana cultivation, processing, and extraction business.
The study noted that the company has yet to generate any revenue and that its valuation was based on projections of future activity that may or may not pan out. Since 2019, it has raised a total of seven rounds of funding, with the most recent round in August 2018 putting its valuation at $39.3m.
Cannasouth proposed to purchase 100% of Eqalis, based in the Bay of Plenty, for $48.8m as part of a merger. The analysis found that both firms were overvalued and that a merger could increase share price but not long-term value due to the maturing of the legal environment and global medicinal marijuana market.
Authorization from the relevant authorities was essential, and it was hoped to have that by March’s midpoint. The analysis concluded that the merger would be beneficial for both cannabis companies and would be an attractive target for a takeover offer.
It’s a great chance to rebrand, win over strategic investors, spread some good news, and get some press from industry watchdogs and analysts, all of which are made possible by the merger. Because of the increased variety of products and services on offer, the merged entity is more likely to be acquired by a competitor in the industry.
