As expected, Mergers and Acquisition (M&A) activity in legal cannabis is rocking, with deals being announced at a brisk pace in both the US and Canada.
The Valens Company ($VLNS) steps forward with a $24.9MM acquisition in LYF Food Technologies, a company claiming expertise in novel product formulation and infusion technology and recipes and all the good stuff. The purchase price can get as high as $42.4MM – contingent upon profit/EBITDA performance.
That’s a lot of money for an 11k ft2 kitchen that doesn’t look like it’s put a cannabis product on a shelf. They did announce a deal with another extractor last August (no word as to output), and claim 25 years experience in the commercial food sector. I’m not sure if/how use of cannabis products works on a packaging line or within production facilities. I’ve got a couple of enquiries out, will let you know in our next Structure (it won’t be long). Perhaps LYF has white label goods out there – there isn’t mention of much except reference to LYF’s own brands (Coming Soon!) on their website. There’s a claim of some 100 recipes though. At a guess, the two companies have likely been on track for to do this for awhile (the reference to infusion technologies at LYF begs a question to me about the utility of $VLNS’ own SōRSE™ emulsification method…like…why not use that? Again, outside of my wheelhouse. Maybe Cyto has some insights. It’s errata…).
This deal expands upon $VLNS’ open declarations of moving towards ‘CPG’ Nirvana…and brings edible SKUs to their product line…adding to existing ‘Health and Wellness’ segments and existing medical and recreational categories.
In the original press release, one finds out the deal is contingent on $VLNS getting a couple of pieces in place. Namely:
One didn’t have to wait long to find out whether they could raise that $22MM. Almost the same time this was announced, another press release was issued, laying out a $35MM raise. The raise is priced at $2.05/share (a discount to the average pricing seen during January), and comes with an over-allotment and 3 year warrants at $2.55.
There’s much to <ahem> digest here.
$VLNS has been far and away the most ambitious of the two ‘major’ extractors in Canada (Medipharm Labs ($LABS) being that other ‘major’. I use that loosely though, $VLNS has really been the only one looking to lead the segment – rather than follow or ape anyone). Given the evolution of the outfit from a small Mom & Pop grow-op into a company that’s becoming more and more indistinguishable from a ‘CPG’ company in any sector: a foray into edibles appears a virtual given.
The typical drivers of ‘value add’ and ‘responsiveness to consumers’ is there, of course. White label services, hydrocarbon/alkane/CO2/mechanical extraction modalities, and the latest flag-plant of telling investors and the market where they are going before the market tells them. <An inside the ropes take of that inventory write-down is that $VLNS is likely in a ‘quiet period’ – as year-end financials are not far off, as they have a November year-end. Since $VLNS wanted to raise, they had to disclose what was coming anyhow. I can’t state for certain, but it makes sense>.
The raise wasn’t cheap, and the market reacted to it being below market predictably:
I can’t see this volatility being helpful to investors. Peripherally – and barely more than a week ago – Alternate Harvest ETF had picked up a chunk of $VLNS equity at $2.75(!) no less (the ETF now owns more than 10% of $VLNS too). Such is the volatility in play right now:
I gotta see this acquisition as $VLNS attempting (having) to increase capacity utilization. I understand their existing shop is dead sexy by pretty much any extraction facility standard. Yet, as we mentioned 15 months ago, extraction capacity in Canada is as excessive as cultivation is. Thus, any visible way forward for $VLNS is to lever the phrase ‘value-added’ into visible margin, and by $VLNS reckoning, hard product differentiation.
They’ll be facing an existing array of edibles (not tons of selection out there yet, but growing. I think of Dynaleo and their claims of $0.10 gummies and of $XLY’s Foray brand here, the latter being anecdotally well received, the former yet to initiate).
$42MM bucks is a lot of money for a business without cannabis history, and reminiscent of a time a couple of years ago when thinking was ‘if you build it, they will come. For $VLNS, I see them facing the same challenges as many cultivators – in packing un-utilized capacity and unabsorbed overhead. If so, the path for them forward has been decided for them: expand the platform. And do it fast.
The kitchen creates off-take, and $VLNS went straight off the high board…staying in form by choosing to own their own means of production rather than outsourcing or subletting. It’s a higher risk strategy, in that they’re more than a year in to 2.0…… yet haven’t demonstrated any real kind of durability in revenue or profitability. I’d tend to think this is one of the factors inducing volatility in their share price, current pot euphoria notwithstanding.
From here, it’ll be up to the market and its’ ultimate appetite for edibles. For the amount of capital that’s gone into this, I’m sure $VLNS is hoping for many hungry consumers.
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 $VLNS.