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CannTrust Holdings Inc. has hired the Canadian arm of U.S. investment bank Greenhill & Co. to help it review options, including the possible sale of the company, as the cannabis producer awaits a decision on its fate from Health Canada.

A sharp drop in CannTrust’s share price over the past three weeks has made the cannabis grower based in Vaughan, Ont., a potential takeover target. The shape of any deal would likely depend on whether Health Canada decides to suspend or revoke CannTrust’s licences as a penalty for growing cannabis in unlicensed rooms in late 2018 and early 2019 – a move that could drive the company out of the pot business. It has already suspended all sales while a Health Canada investigation is carried out.

“The nature, timing and outcome of the strategic review process will be influenced by, among other things, the resolution of the company’s regulatory compliance issues with Health Canada," Canntrust said in a statement.

The strategic review “could include, among other things, a sale of the company or a portion thereof, a strategic investment, a business combination, changes to the company’s operations or strategy, or continuing to execute on the company’s current business plan,” the statement said.

The announcement comes six days after CannTrust fired chief executive officer Peter Aceto “with cause” and forced its chairman, Eric Paul, to resign. CannTrust shares jumped 8.8 per cent on Wednesday. The company’s stock price has declined 52.2 per cent since July 8, when CannTrust said it had received a non-compliance order from Health Canada.

In an interview on Tuesday, before the Greenhill announcement, interim CannTrust CEO Robert Marcovitch said the company was “absolutely exploring all options for every aspect of the business, whether it’s function, financial, operational.” When asked whether it would consider takeover bids, he said, “it’s premature to even have that conversation. At this point in time, we are aggressively getting our house in order.”

Any potential acquirer of CannTrust would face uncertainty about legal liability and the actual worth of the company’s assets. Health Canada can suspend or revoke CannTrust’s licences, issue fines, and order the company to destroy thousands of kilograms of inventory worth tens of millions of dollars.

Law firms are seeking plaintiffs for attempts to bring class-action lawsuits against CannTrust on behalf of shareholders. The company could also face sanctions from securities regulators on both sides of the border, after CannTrust and several insiders sold US$195.5-million worth of shares using a prospectus that included production numbers from the illegal, unlicensed areas.

On Monday, The Globe and Mail reported that a holding company controlled by Mr. Paul sold millions of dollars worth of CannTrust shares in the weeks after he was informed about the unlicensed growing activity at CannTrust’s facility in Southern Ontario.

“Given the ongoing potential legal liabilities, it is unclear if the strategic review will result in a sale of the company,” Bank of Montreal analyst Tamy Chen said in a research note on Wednesday. CannTrust has several high-value assets, including a greenhouse in Pelham, Ont., and a processing facility in Vaughan.

“We believe the Niagara greenhouse would provide value to [licensed producers] that are relatively behind on their [increases in cannabis] production. … The Vaughan facility would provide processing capacity that includes extraction and packaging. However, if Health Canada ultimately revokes the licences at these facilities, the sale of these assets would likely be expedited at a deep discount,” Ms. Chen wrote.

That latter situation is what happened when the licence of Ascent Industries Corp., a British Columbia-based cannabis company, was suspended last September after federal inspectors caught it diverting product into the black market.

Ascent’s top managers were forced out after the licence suspension; the interim CEO hired investment bank Clarus Securities Inc. to shop around Ascent’s assets to other licensed producers and companies outside the cannabis space. After multiple bidding rounds, Ascent’s B.C. cultivation and extraction assets were sold without a licence for $41.5-million to BZAM Management Inc., a private company with no experience in the industry. Ascent was forced to destroy its inventory.

Kibben Jackson, a partner with the law firm Fasken LLP who acted as counsel for BZAM in the Ascent acquisition, said potential acquirers for CannTrust would have three options if the company loses its licence.

“They could buy just the assets, and that’s going to drive the value down significantly. They could enter into an agreement which has a condition that the licence be reinstated and the suspension be lifted, in which case there’s probably a good premium value for it, but there’s not certainty for CannTrust that they’ll ever get the deal done.

"The third option is they do their own due diligence and figure out what the likelihood is that the licence suspension will be lifted, and buy the licence and be prepared to take it on with Health Canada, the risk being that you’ve overpaid for assets if you don’t get that licence fixed,” Mr. Jackson said.

The shape of any deal would depend on how quickly CannTrust would want a transaction to happen, Mr. Jackson said.

“If there’s no urgency, you can sign up a deal that says, ‘as long as we are satisfied that this licence is in good standing and will remain so, we’ll do the deal.’ In which case, what kind of discount do you have to give? But if there’s some pressure on getting a deal done, you’re not going to find a buyer willing to pay a proper price or a premium for your licence or assets,” Mr. Jackson said.

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