4Front Ventures Corp. (CSE:FFNT) is poised to become a leading vertically-integrated, multi-state operator with 4Front merger
SmallCapPower | January 28, 2019: 4Front Ventures Corp. (CSE:FFNT) (FFNTFOTCQB:) announced on November 26, 2018, a strategic merger with 4Front Holdings, LLC, which will create a vertically-integrated, multi-state operator (MSO). Cannex and 4Front entered into an all-stock merger whereby the shareholders of 4Front will be entitled to receive a fixed ratio of Cannex common shares, such that the shareholder ratio will proportionally equal 1:1.75 Cannex shareholders to 4Front shareholders on closing of the business combination.
Potential synergies include: the combination of Cannex’s cultivation and processing expertise with 4Front’s complimentary distribution and retail prowess, which would likely create a vertically-integrated titan across the cannabis value chain (cultivation, processing, extraction, distribution, and retail). With retail and distribution across four U.S. states, namely Illinois, Massachusetts, Maryland, and Pennsylvania, the combined entity will operate five existing cultivation and production facilities in Washington, Illinois and Massachusetts and at least five retail operations in Illinois, Massachusetts, Maryland, and Pennsylvania. Its near-term growth objective is to expand the total number of owned/comprehensively-serviced cannabis operations to 19 by year-end 2019.
Solid balance sheet, capital injection from Gotham Green Partners to fund further M&A. On November 21, 2018, Cannex announced it raised US$32M in 3-year senior secured convertible notes, with the following interest rates: (Year 1: LIBOR + 11%, Year 2: LIBOR + 10%, Year 3: LIBOR + 9.5%, current 12-month US LIBOR, 3.03% ), convertible at a 25% premium to the reservation price of C$0.88, which amounts to C$1.10 per share. The financing was raised from Gotham Green Partners (GGP), a New York-based private equity firm focused on the cannabis sector. Cannex intends to use the proceeds to enhance its processing and distribution networks, as well as retail acquisitions & buildouts to further strengthen its foothold, branding, and multi-state expansion. Importantly, the GGP team brings a breath of knowledge as they are early investors in the cannabis space. GGP is also well connected, with an excellent pipeline of opportunities that Cannex can leverage to accelerate its growth. The Company is eyeing brand-building initiatives with both existing and new brands, which include cross-licensing. A part of the proceeds would go towards repayment of its $9.4M debt.
On November 1, 2018, CNNX acquired a 10% founding ownership interest in New Zealand-based Soma Group Holdings for US$750K. Soma is a CBD-focused start-up currently developing innovative CBD products for licensing through an R&D partnership with the New Zealand government. Soma’s CEO Mike Healy has 25+ years experience in the global life sciences industry, as well as nine years of experience as CFO of Apotex Australia and Asia Pacific. The acquisition gives the Company a first-mover advantage, expanding into New Zealand’s cannabis market, in addition to the potential AUD$3B+ Australian medical market and AUD$8B+ Australian recreational market (Prohibition Partners) and potential Asian market.
Company Strategy Going Forward: Become a Multi-State Operator (MSO) comparable to Acreage Holdings (CSE:ACRG.U | $21.98) or Curaleaf (CSE:CURA | $7.75) with a presence in 5+ U.S. states. We believe in order to become a leading MSO, Cannex’s focus will be on attaining a strong retail presence in 3+ large population states (California, Nevada, Florida, New York, and Arizona), plus an additional 5/6 second-tier states (Illinois, Colorado, Maryland, Michigan, New Jersey, Ohio, and Washington). The Company plans to maintain market share and significant margins with a focus on a strong retail branded presence as well as diversified branded product portfolio Currently, Cannex owns the Top 2 premium dried flower brands in Washington State, as well as 7/10 of the top edible brands, which can easily be cross branded into new legal cannabis states. The Company expects to continue to develop its intellectual property portfolio, as well as look for a pharmaceutical partnership.
Primed for significant growth in 2019. On December 31, Cannex reported FQ2/2019 financials. Revenue and Adj. EBITDA came in at $3.1M and $1.0M, respectively, vs. $3.4M and $1.7M from FQ1/2019. We believe that Cannex’s future revenue growth looks promising, and with the closing of recent acquisitions coming up, that will only accelerate further. CNNX generated positive net income, due primarily to favourable gains on foreign exchange and derivative instruments. Working capital was reported at $9.7M, an increase of 21.9% over the previous quarter, and the cash balance now sits at $10.0M.
Share Prices as at close Jan 18, 2019
Trades at a discount to peers. The Company trades at an 8.8x 2019E EV/EBITDA multiple, compared with U.S. multi-state operators and Canadian majors, which trade at a consensus average of 11.4x and 37.4x 2019E multiples, respectively. We believe that this valuation gap should close upon closing of the 4Front Transaction and successful execution of the Company’s multi-state operator strategy.
Cannex Group Holdings Inc. (Cannex) is a Canada-based company that provides a range of services including real estate, operational infrastructure, management & consulting services, financial support, and branding to licensed cannabis business operators. Primarily operating in the U.S., Cannex is focused on premium indoor cultivation, extraction, value-add manufacturing and branding of edible and derivative products as well as distribution and retail operations. The Company is building a portfolio of scalable, cash-generating cannabis assets that produce consistent and reliable branded products that can be cross-licensed to Cannex portfolio companies or independent operators. The Company’s subsidiary, BrightLeaf Development LLC, owns the assets of the largest producer/processor in Washington State, Northwest Cannabis Solutions.
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