Emblem Corp announced the results of its special meeting yesterday to approve its merger with Aleafia Health Inc. (TSX:ALEF)
SmallCapPower | March 7, 2019: Merger approved by Emblem shareholders. On March 6, Emblem Corp. (TSXV:EMC, $1.87) announced that the proposed merger with Aleafia Health Inc. (TSX:ALEF, $2.34) passed with 93.5% of votes cast. Recall, the merger was announced on December 19, 2018, whereby Aleafia would acquire Emblem in an all-stock deal valued at $1.21/share (27% premium). For reference, this implied 2020E takeout multiples of 0.6x sales and 2.4x EBITDA. At the time, the intermediate cannabis companies were trading at a 2020E average of 1.6x and 4.2x, respectively. The transaction is now expected to close within 1-2 weeks, when EMC is expected to be delisted.
As CEO Geoff Benic mentions the Emblem acquisition rapidly accelerates the execution of Aleafia Health’s strategy to become a vertically integrated, diversified cannabis company.
Aleafia Health and Emblem merger to create one of the largest medical cannabis companies. With a total production goal of 140,000 kg, the combined entity has the potential to be in the same league as the other major Canadian LPs. The combined Company’s planned, and fully-funded, production capacity would be comparable to the 150,000 kg planned and funded capacity of Aurora Cannabis Inc. (TSX:ACB, $10.59 | N/R), Hexo Corp. (TSX:HEXO, $7.31 | N/R) at 108,000 kg, and Organigram Holdings Inc. (TSXV:OGI, $9.12 | N/R) at 89,000 kg. With the expanded production capacity, the combined entity expects cost synergies. Once the merger is completed, the Company plans to focus on high-margin products such as oils, sprays, sustained release tables, and CBD-infused wellness products.
Combined Aleafia/Emblem entity to be a R&D, extraction, formulation, distribution, and retail powerhouse. Emblem’s high-quality medical formulation includes metered dose sprays and exclusive Canadian rights to sustained oral release tablets. Additionally, Aleafia would have access to Emblem’s testing and R&D, including sleep studies, CPG product formulations with high-margin products such as beverages, edibles, vapes, topicals, and concentrates. This coupled with Canada’s largest cannabis clinic network, supply agreements with Shoppers Drug Mart, JV in Germany, and Aleafia’s supply agreements with Ontario, BC, Alberta, Saskatchewan and retail partnerships, would give it the ability to scale to the level of other Licensed Producers. The combination of Canabo (Aleafia) and GrowWise (Emblem) Health medical cannabis clinics creates the largest clinic network with 40 locations and 60,000 individual patients.
*Pro Forma estimates utilize Aleafia fully diluted share count of 180M + Emblem Share Consideration (123M x 0.8377) = 283M shares outstanding post-merger.
Undervalued to peers. The pro-forma Company trades at a 17.5x 2019E and 7.7x 2020E, EV/EBITDA multiples, compared with Canadian majors, which trade at a consensus average of 42.5x and 24.9x multiples, respectively. We believe that this valuation gap should close once the Company ramps up production by the end of 2019.
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