Newstrike Brands Would be Wise to Sell Out

Could Canopy Growth Corp (TSX:WEED) emerge as the front runner for Newstrike Brands Ltd. (TSXV:HIP)?

SmallCapPower | September 18, 2018: Newstrike Brands Ltd. (TSXV:HIP), a Toronto-based cannabis company, is reportedly looking to sell or merge its wholly-owned subsidiary Up Cannabis, according to BNN Bloomberg. Up is a licensed producer of cannabis that received its cultivation license on December 2016 and was granted an amendment to begin sales in January 2018. Up Cannabis produces dried & fresh marijuana, marijuana plants & seeds, cannabis resin and cannabis oil. It is responsible for the development of artsy recreational cannabis strains inspired by The Tragically Hip’s song titles.

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According to sources Newstrike Brands, one of the Canadian cannabis stocks, approached at least four cannabis companies in August for the sale of Up Cannabis. If a sale doesn’t go through, Newstrike is willing to merge the Up Cannabis brand with another company, which is also developing recreational cannabis products that are closely tied to rock musicians.

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Newstrike Brands spokesperson PM Redon told BNN Bloomberg recently, “We have a strong cash balance of approximately $125 million at the end of June, and we will continue to take an active role in industry discussions regarding mergers and acquisitions, partnerships, joint ventures and licensing agreements to build out our product offering and maximize value for our shareholders.”

Newstrike Brands has signed distribution deals with five provinces and has current production capacity of 12,500 kilograms, which is expected to double by early 2019. Newstrike reported a loss of $8.6 million at the end of the second quarter and has yet to report any revenue since it completed a reverse takeover in June 2017.

Canopy Growth Corp. (TSX:WEED), the early leader in cannabis branding, would be a potential fit, especially as rival Aurora Cannabis Inc. (TSX:ACB) continues to make acquisitions.

The cannabis industry anticipates significant consolidation in the near future as economies of scale always benefits any commodity-type business. Newstrike Brands trades at a market capitalization of $449.73 million with a price-to-book multiple of 2.84x. Post the announcement, the Company’s stock climbed 5.19% on the TSXV to close at $0.81 on Friday.

Disclosure: Neither the author nor his family own shares in the companies mentioned above.

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