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mergers and acquisitions

How much is a small licensed cannabis facility worth in early 2020? As little as $3-million, it would seem, based on Golden Leaf Holdings Ltd.’s sale of Medical Marihuana Group Corp.

On Monday, Golden Leaf said that it sold two subsidiaries – Medical Marihuana Group (MMG), a St. Thomas, Ont.-based cultivation facility, and Medical Marijuana Group Consulting Ltd. (MMC), a consulting company focused on medical marijuana – to Sensi Brands Inc. for $3.4-million. Sensi also assumed $400,000 of Golden Leaf’s debt.

The strikingly low price for a fully licensed facility illustrates how far the market value of cannabis assets has fallen over the past two years. In late 2017, Golden Leaf acquired MMG and MMC for $10-million and $5-million respectively. MMG was not even licensed at the time.

“The sale of the Canadian operations allows the company to strengthen its balance sheet and focus its resources on its principal markets in the U.S.,” Toronto-based Golden Leaf said in a news release about the deal.

"It’s definitely the lowest price I’ve seen,” said Aaron Salz, who runs capital markets consulting firm Stoic Advisory Inc. "When I started out three years ago doing a couple smaller deals, our first two or three deals were $20-million, $30-million M&A deals, and they were selling [20,000 to 30,000 square foot]facilities that just got licensed.”

Since then, the value of cultivation assets in particular have been hit from all sides: legal sales are lower than many companies anticipated, in part because of limited retail outlets; pests, diseases and poor genetics are impacting crop yields; and the licences are rapidly losing their scarcity value as Health Canada issues more.

MMG’s fire sale price tag may come as a shock to investors wondering how much low- and mid-tier LPs are now worth, given current market conditions. But in some respects, the company was lucky to offload the assets at all, Mr. Salz said.

“Of the 200-plus licences out there, just your Joe Blow facility that’s 20,000, 30,000 square feet, not turning a profit – because none of them really are – they’re doing maybe a couple hundred thousand dollars a month in sales, ... there’s no real buyers for those,” Mr. Salz said.

The lack of a market for small and mid-sized cultivation assets may become an industry-wide problem in the very near term, Mr. Salz said, as companies attempt to liquidate assets to stay afloat. Many LPs are running out of cash and facing maturing debt loads, and capital markets have largely closed to underperforming cannabis growers.

Finding buyers, however, won’t be easy.

“The facilities are so specialized that there’s essentially no secondary use for them, so the salvage value is going to be below book, because the cost to just take everything apart and sell lights and other things, is going to cost you, so it’s going to sell below what you built it for. And everything has depreciated in there a bit, and there’s no secondary use, and they’re just not economically viable or profitable businesses as they are,” Mr. Salz said.

Even larger LPs are having to offload assets at discounts. Aurora Cannabis Inc. is looking to sell an unlicensed greenhouse for $17-million that it acquired from MedReleaf in 2018. MedReleaf bought the asset only months before being acquired by Aurora for $26-million (which included $21.5-million in cash).

“We have taken time over the past year to evaluate the potential to utilize the greenhouse for R&D or extraction based activities. We have concluded that this non-operational greenhouse would require retrofit and significant capital investment in order to meet Aurora’s production standards,” said Michelle Lefler, Aurora’s vice president of communications.

“Aurora has taken decisive steps to rationalize capital expenditures and align our cultivation footprint to current demand, including selling the Exeter facility,” she said.