CURLF - Cronos Group: Unlikely Deal

2023-07-10 15:50:08 ET

Summary

• Cronos Group Inc. apparently received multiple unsolicited indications of interest.
• The cannabis business is trading below tangible book value, especially intriguing is the cash balance of $836 million.
• Cronos Group is unlikely to see a deal completed due to the regulatory issues and the unlikelihood that anyone wants the business outside of a discounted price.

Over the last week, news reports suggested Cronos Group Inc. ( CRON ) was in merger discussions with the likes of Curaleaf Holdings ( CURLF ). Considering Cronos Group trades far below tangible book value and management has done very limited with the cash on hand, shareholders would probably be far better off with new management investing the large cash reserves here. My investment thesis remains Neutral on Cronos Group, yet shareholders might get bailed out here with a buyout, though unlikely at this point.

Failure To Launch

Cronos Group surged to over $20 back in 2019 on obtaining a large investment from Altria Group ( MO ). Unfortunately, though, the company has still failed to really launch a cannabis business while burning a lot of the cash in the process.

The Canadian cannabis company has reported relatively decent revenue growth during the period, but Cronos Group has only reached the point of $20 million in quarterly revenues. A lot of the cannabis companies in the U.S. have reached the $1 billion annual revenue rate without obtaining large cash infusions.

Cronos Group has a remaining cash balance of $836 million, but the company is still losing $17 million per quarter in adjusted EBITDA. The business really doesn't offer much to another company other than the large cash balance.

Heck, the Canadian cannabis company just exited the U.S. hemp-derived business , leaving the business focused on the difficult Canadian cannabis market. The new goal includes further cost cuts and has Cronos Group implementing a 2023 operating expense target reduction of $20 to $25 million.

Where Cronos Group gets really interesting is the stock trading below tangible book value. The stock now trades at only 0.7x TBV with a market cap of just $775 million.

The only real apparent reason to acquire Cronos Group is to buy the assets below TBV. Shareholders could definitely be enticed to unload Cronos for shares in a more aggressive cannabis operator with positions in the U.S.

After all, cannabis assets are beaten down, and now should be the time to unleash the cash hoard to invest for a rebound and ultimate federal legalization in the U.S. The problem facing such a deal is whether Altria could remain an investor in a business owning plant-touching assets in the U.S. and whether other shareholders want a stock trading on the OTC. Not to mention, the deal would be ugly to obtain regulatory approvals.

Unlikely To Get A Deal

Last week, Cronos Group confirmed the company had received multiple unsolicited indications of interest. The stock traded down in the $1.60 range, probably leading to a level of interest for an acquirer to "steal" the business.

A deal appears highly unlikely, with multiple potential bidders making it unlikely for a company to acquire the business at a significant discount. Besides, the biggest issue is the regulatory side.

Cronos Group already trades on the Nasdaq due to operations focused in Canada and only having a U.S. hemp business now being shut down. An acquisition by an MSO (multi-state operator), such as Curaleaf, would be messy. Not to mention, an MSO wouldn't appear to have much interest in the business under the current regulatory hurdles.

TerrAscend ( TSNDF ) just uplisted to the Toronto Stock Exchange without much in the way of investor benefit. The convoluted corporate structure and the lack of trading on a major U.S. stock exchange reduces the ultimate benefits of uplisting to the TSX.

Assuming an MSO or another company better at allocating capital comes around with a bid at or above TBV, Cronos shareholders should take the offer. Such a deal appears highly unlikely, though.

As Curaleaf mentioned, the company regularly examines transactions and mergers with third parties. Cronos Group would be a perfect example of a deal worthy of examining, but one unlikely to materialize unless the Cronos shareholders are willing to take a significant haircut to asset values.

Takeaway

The key investor takeaway is that Cronos Group Inc. is unlikely to see a merger at a premium valuation to TBV. The business doesn't offer much to external cannabis operators outside of a discounted deal. Besides, the regulatory issues are likely too high to overcome at this point to warrant the headache of a deal by a large U.S. MSO.

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