TransCanna Holdings Lifestyle Delivery Deal: Why the Negativity

Here’s why we think the proposed TransCanna Holdings Inc. (CSE:TCAN) acquisition of Lifestyle Delivery Systems (CSE:LDS) failed to make a good first impression with investors

SmallCapPower | July 3, 3019: TransCanna Holdings Inc. (CSE:TCAN) announced on July 1, 2019, that it plans to acquire Lifestyle Delivery Systems Inc. (CSE:LDS) in an all-stock deal valued at $51.7M, or $0.43 per share, based on an exchange ratio of one TransCanna share for 10 Lifestyle Delivery Systems shares. The all-stock transaction represents a 16.6% premium over LDS’s closing price of $0.37 on Friday, June 28, 2019. This implies a 4.8x and 1.0x takeout multiple based on Lifestyle Delivery Systems’ last twelve months (LTM) and 2019E revenues of $6.8 and $34.2M (the 2019E estimate is LDS’ own projections). This implies a discount to U.S.-based majors and intermediates, which trade at LTM EV/Revenue multiples of 30.7x and 82.1x, respectively, and 2019E EV/Revenue multiples of 11.0x and 6.3x, respectively.

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The acquisition of LDS would add CannaStrips™, its leading brand, to TransCanna’s brand portfolio, which should help the Company gain further market share in the California cannabis market. In terms of synergies, TCAN adds cultivation, nursery, manufacturing, transportation, and distribution licenses to the portfolio of Lifestyle’s assets. The transaction also increases TransCanna’s footprint, as Lifestyle Delivery Systems operates a 20,000 sq. ft laboratory, a 20,000 sq. ft warehouse, and 25 acres of land in Adelanto, California, in addition to TCAN’s 196,000 sq. ft facility (in construction) in central California.

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Investors did not view the Lifestyle Delivery Systems deal favourably, as LDS shares fell 15% to $0.315 at the close of Tuesday’s trading session, the first trading day after the deal was announced.

Given that this deal is an all-stock transaction, we believe the sell-off in Lifestyle Delivery Systems shares has been driven by TransCanna’s upcoming share lock-up expiration. TransCanna has ~12.2M shares that were issued at less than $0.50/share, which are expected to become free trading on July 8, 2019. In addition, TransCanna issued 8M shares and 4M warrants at $2.00/share on April 4, 2019, which are subject to a four-month hold that will unlock at the beginning of August 2019. In total, TransCanna has ~24M shares that will become free trading during the next five weeks. As such, ~24.2M shares will be added to TransCanna’s float at a cost far below the Company’s current share price of ~$4.03.

Lifestyle Delivery Systems – Company Description

Lifestyle Delivery Systems is a cannabis technology company that licenses its technology for cannabis-infused strips (similar to breath strips). The Company reports that its CannaStrips™ are safer and healthier compared to traditional inhalation methods. Additionally, the strips are claimed to have superior bioavailability compared with conventional methods of ingesting cannabis. The technology provides a new way to accurately metre the dosage and assure the purity of a selected product. LDS is currently licensing its technology to a state-of-the-art packaging facility in California.

TransCanna – Company Description

TransCanna Holdings Inc. is a Canada-based company that specializes in assisting cannabis farmers and manufacturers located in California by providing branding, extraction, bottling, transportation and distribution services, through its subsidiaries in California. With its knowledge and expertise, TransCanna plans to build a portfolio of 15 premium brands. The Company is currently constructing a 196,000 sq. ft vertically-integrated cannabis facility located in central California, which is expected to be used for manufacturing, bottling, extraction, and transportation/distribution.

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