Well, Village Farms made the only move they really could….and secured Emerald Health’s ($EMH) interest in the Pure SunFarms joint venture. Naturally, the financing was tidied up and put in place to coincide with the announcement.

Readers here should have a good line of sight on $VFF and the PSF asset. Indeed, while $EMH’s travails holding onto their half of the golden goose began earlier than last fall, it took less than a year from there for it to be taken right out of their hands. If you’d like something to chuckle about, here’s a guy on $EMH’s conference call back in December 2019, not exactly asking a question but offering management an opinion on how they were doing.

I’d been pessimistic that $EMH would ever make it easy to let go. I fully expected litigation and a hard walk through the courts and JV agreement. Instead, they now seem pretty optimistic about the whole thing. And they should be. Despite shopping their Verdélite asset around for the past 5 months, there’s been no apparent buying interest, which, probably helped lubricate this deal’s wheels.

$EMH has been going broke at a pretty good clip – unable (or unwilling) to even pay $900k owed to the JV from last March. Given the cash balance from their most recent financials (ending June 30th) saw them holding a $1MM in cash, $8MM in inventory, and $42MM in current liabilities – PSF represented the only ‘producing’ asset they hold. And I can’t see this as simply $EMH’s financial duress prompting this. It’s as easily driven by $VFF’s financials as well…… a breakeven veggie business (at best) supported by a cannabis company’s capital structure. There’s a big disconnect over asset pricing under those sectors, and veggies won’t cut it. $VFF with only half of PSF is (to myself) was effectively in the same shape as $EMH, and going nowhere.

An interesting bit of this deal is the purchase price of $80MM, which is about $10MM more than the carrying value of the JV on $EMH’s books. So they’re getting some uplift from previous capital contributions, and if $EMH got something out of negotiations, it’s 12% on a 6 month $20MM note. Their capital structure just got a steel rod inserted at the expense of the only proven asset they own, and creditors probably sighed in relief.

The upshot for me is that now I don’t have to rummage through 2 sets of financials to view PSF’s performance. And both of these companies are now in far better position than before this deal. Emerald’s got a significant amount of debt gone, $VFF’s got its’ very own 100% owned cannabis business.

The market dynamic from here will be how aggressively $VFF pursues competition on price, and exactly how profitable that strategy will turn out. I’m expecting that lower prices will eventually hit a floor – that either provinces or the feds will set them, or, perhaps the realities of the costs of state monopolies and direct taxation will set them by default – and then product sales will be ultimately be driven by quality and consumer preference. It’ll be a great sign to see on the path of sector maturation, and at any rate, Health Canada’s policy anticipated marketing on price. Recall, reducing ‘overconsumption’ was a specific goal from legalization’s outset, and one of the main rationales of why such high direct taxation was put in place from the start.

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Mike Gorenstein has stepped out of the big chair, stepping into an executive role on the Board of Cronos. According to him, he’s been looking for a year for a replacement, and the new guy brings the letters CPG tattooed on his chest, with stints at Gerber, Kraft, and a board position at no less than Campbell’s. He’s definitely the most seasoned CPG leader we’ve seen come into cannabis, and probably fits the ‘oak boardrooms with marble fountains‘ vibe that Cronos’ puts out.

While hardly a surprise, Mike probably looked high and low, took his time, and made a very deliberate decision. Perfectly keeping in character. Now it’ll be seen what the new guy can do to navigate the waters. For a company with so much invested in non-plant derived cannabinoids, it’s a bit of a curiosity that the new CEO has little direct experience in science or commodities.

What does CPG look like? From Supreme’s self description, it came out almost immediately after the last guy’s departure, along with an ‘acceleration’ in their transformation to a ‘CPG company’:

“Supreme Cannabis’ brands are backed by a focused suite of world-class operating assets that serve key functions in the value chain, including, scaled cultivation, value-add processing, automated packaging and product testing and R&D.”

Expect the same tone to come out of Cronos. And yep, CPG is boring for a reason. It usually takes a good long while to create and build a brand and value within it. And this new guy is pretty much starting at zero, ‘fortress balance sheet’ and all.

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Similarly, Aurora got their new CEO from in-house, after a US CBD acquisition earlier this year got them a CPG type, ironically with a history at Altria no less. The one thing about Martin’s appointment: meteoric. One doesn’t go from sales guy to CEO of ACB unless they are ambitious, and one might muse $ACB might have had a hard time finding the right replacement. I don’t think so – I believe there’s many people who would like to run that ship, even if it’s in rough waters right now. What his ascension means to me is that his head is exactly where the Board’s is at this time, and they’ve like what they’ve seen him do as CCO.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in any of the companies mentioned.