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Two deals reflect Canadian marijuana firms’ differing U.S. strategies

Marijuana plants grow at a lab in Cottage Grove, Minn., in a June 17, 2015, file photo.

Jim Mone/THE ASSOCIATED PRESS

Canadian marijuana firms are facing a fork in the road over their exposure to the United States.

Two separate deals unveiled Tuesday highlight the extremes of the dilemma: Leave the growing market south of the border completely or push even deeper.

Vancouver's Namaste Technologies Inc., an online retailer of marijuana accessories, is selling its U.S. assets. CannaRoyalty Corp. of Ottawa, on the other hand, announced the acquisition of two California-based companies.

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The laws governing cannabis are hazy in the United States. Many states allow the drug within their borders, but it is still illegal under federal law.

This has kept many large investors and banks on the sidelines and forced big players in health care, alcohol and tobacco to stay away from the United States, even in states where cannabis is legal. TMX Group Ltd., which operates Canada's two most popular stock markets, won't list the shares of companies that violate U.S. federal drug laws.

In the case of Namaste, which sold its two web domain names that serve the U.S. market for $400,000 (U.S.) in cash, the move is all about marketability. Offloading its U.S. assets – which account for just 7 per cent of its sales – opens the door to being acquired or graduating from the small Canadian Securities Exchange (CSE) to the larger TSX Venture Exchange.

"It sets the table up to be taken out, to move up to the Venture and makes us profitable [sooner] for 7 per cent of revenue," said Sean Dollinger, CEO at Namaste. "It is a no-brainer. All of our investors should be happy about that."

CannaRoyalty is taking the opposite approach, betting there's money to be made in a market that is seen as more risky than Canada in the current regulatory environment.

Its big play is in the state of California, which is set to fully legalize cannabis on Jan 1.

CannaRoyalty, which has a market cap of $132-million (Canadian), is acquiring a firm that owns the rights to make and sell a popular brand of vape pens in the state. It's also adding a company that distributes various cannabis products to more than 200 dispensaries in California. The two companies generated a total of $12-million in yearly sales to Oct. 31 in a medical market.

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The company says that Canada's marijuana market is already too crowded with growers that are fighting for a slice of a much smaller pie than what's up for grabs in California. And while it still owns stakes in other marijuana assets in Canada, CannaRoyalty is bullish on the opportunity it has in the near term to build a portfolio of valuable cannabis brands south of the border.

"I, frankly, have been surprised with how slow the Canadian investor has been to figure this out," said Marc Lustig, its chief executive.

"There's no question that California is going to be the next trade in cannabis as the Canadian cannabis trade has gotten very, very expensive."

Most of the public cannabis companies with U.S. exposure, including CannaRoyalty and Namaste, are listed on the CSE. In recent months, these stocks have traded at a discount to their Canadian peers, as investors wrestle with the regulatory uncertainty.

Namaste, which owns 300 domain names and has a market cap above $200-million, is also in the process of obtaining a license to sell medical cannabis in Canada. It is planning to sell marijuana to people that have already bought accessories such as vaporizers on its sites.

As part of its deal to sell U.S. assets, it will retain the database of 520,000 American cannabis users that it's built. But it intends to leverage it once again only after the U.S. federal government legalizes the drug.

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Asked to sum up the sale, Mr. Dollinger says it "doesn't have one bad part about it."

Shares of Namaste have gained almost 240 per cent in the last five days of trading. On Tuesday, they fell 6 per cent to $1.05. CannaRoyalty's stock declined 4 per cent on the day to $3.17. Its stock has gained sharply in the last two weeks.

Andrew Willis: Why you shouldn't buy into the pot boom and bust (The Globe and Mail)
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About the Author
Capital Markets Reporter

Christina Pellegrini is a reporter at The Globe and Mail and a regular contributor to Streetwise, covering capital markets, the exchange business and market structure.She writes about the capital markets divisions of BMO, CIBC and National Bank; independent brokerages such as Canaccord Genuity; and the Canadian operations of foreign dealers including JP Morgan, Goldman Sachs, Credit Suisse and Citigroup. More

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