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BEWARE - Giant White Elephant in the Room.

January 22, 2019

 

Tilray, Inc. (TLRY)  $72.73 – $4.57  will acquire all of the issued and outstanding securities of Natura Naturals Holdings for CAD 35 mln in cash and stock (77.20) As a result of the acquisition,  Tilray will obtain Natura's 662,000 square-foot greenhouse cultivation facility, of which 155,000 square-feet are currently licensed, and all subsequent cannabis output from this facility. Natura, through a wholly-owned subsidiary located in Leamington, Ontario, is a licensed cultivator under the Cannabis Act specializing in the greenhouse cultivation of cannabis. Under the terms of the definitive agreement and subject to certain customary adjustments, Tilray will deliver C$35 million at closing, comprised of C$15 million in cash and C$20 million in Tilray Class 2 common stock. Natura shareholders will receive their pro rata portion of the C$15 million closing cash amount.

As the stock-price decline indicates, the Street doesn’t like the deal.


Why should it?     
As a result of the acquisition, TLRY  will own Natura's 662,000 square-foot greenhouse cultivation facility. The planned acquisition is a GIANT WHITE ELEPHANT since the "facility" is overpriced, poorly constructed, difficult to maintain  and its operations are not cost effective without a major spending cycle.   


What’s the deal worth?
Natura's 662,000 square-foot greenhouse cultivation facility is a GIANT WHITE ELEPHANT with a “cost of production at $2,350 per pound."  Just from the numbers, the deal offers a troubling picture.   In Ontario,  the quoted price of premium grade cannabis is $5.25 a gram or $2,382 a pound, taxes included.  With federal, local taxes and related markups, 34 percent of the gross costs on any sale comes off the top, representing $1.79 per gram.  Calculate-in 64 percent for direct and indirect growing costs at the farm level, and before any product processing, packaging and delivery, adds $3.36 per gram to the  cost.   Therefore, one gram of cannabis in your hand at the farm cost $5.15 – fully taxed and grown – or $2,338.10 per pound.  With product processing, packaging and delivery, the 14 percent costs represents $0.74 per gram. From seed to store, the total cost of the product on the shelve is $5.89 per grain or $2,674.06 per pound.
Consequently,  for every pound produced at Natura and placed on a shelve, TLRY will lose $0.34 per pound.  Naturally, if the price of premium cannabis is greater than $2,350 per pound, TLRY may  benefit, but the acquisition will not generate the necessary positive cash flow to service the debt or the continual up keeping cost of the facilities. TLRY would need a long-term price for premium cannabis at $3,400 to breakeven on the investment. Whether that is possible cannot be foretold, and the likelihood of a $3,400 per pound support price may not probable as more growing facilities, especially in the international markets, come on stream. What happened to the prices of  tea, coffee beans, chocolate, and even tobacco proves the point that commodities  are calculated on the factor of supply and demand.

 

Have you followed our noise?

From our SP+GTM algorithm we suggested in the pages of Cannabis News to buy TLRY when it was public in the $23 to $27 range and said to hold the stock until  it reached $300  per share or further notice. At $300 we said, "SELL AT THE MARKET" ... a "decline to the $70 range is likely in the near term."  Well, we were correct --- TLRY when from $20.10 to $300 in less than one year, and now sell at $72.89 per share.  If you still own it, SELL TLRY - it's worth $20.00 per share.



 

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