CM Market Insights

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Passionate active investor with a focus on core fundamentals and opportunity based decision making.

Could This Cannabis Stock Be the Next Takeover Target?


Liberty Health Sciences (LHSIF) and its growing presence in the state of Florida has a share price that is relatively undervalued compared to its U.S. counterparts.

The medical marijuana market in Florida is growing rapidly and is one of the key states for licensed producers to be operating in. LHSIF is currently the fourth largest LP in Florida and already has opened eleven physical stores (12th store will open in Gainsville on March 20th). The patient base of Liberty for their most recent quarter ended November 30, 2018, was 14,500 patients. This was an increase of 46% over the current quarter. In addition to their footprint in Florida, LHSIF holds licenses in both Massachusetts and Ohio.

A potential partner or acquirer may value that LHISF has made a presence in Florida but they still have some room to scale for which the acquirer could add some value. Based on license restrictions, it would be more probable for an MSO without a Florida presence to acquire LHSIF. For the right MSO (multi-state operator), the purchase of LHSIF could round out their footprint and immediately add value.

The Assets

In addition to storefronts listed above, a major advantage of Liberty Health Sciences is their cultivation facility. The company expects to have the construction completed in 2019 and it will add 225,000 square feet of processing and production space. As noted in their press release, LHSIF is fully funded for this expansion which is a positive for the company. Further, the facility has recently been GMP certified which is necessary to meet the Florida Department of Health Requirements.

In addition to their Florida footprint, Liberty Health Sciences plans to open a dispensary in Ohio in March 2019. The Ohio market is quite large and LHSIF has also secured a 10,000 square foot processing facility as a result of a joint venture. Having the ability to operate outside of just Florida could be positive factor potential buyer and the Ohio market is highly coveted. The GMP certification emphasizes Liberty’s commitment to quality and reduces risk to a potential suitor.

Aphria Connection Terminated

LHSIF was commonly thought be Aphria’s method to enter the U.S. market in a prompt and inexpensive manner upon legalization of cannabis.

Until now, any MSO or potential acquirer may not have even considered Liberty Health Sciences as a takeover target. The short seller report issued by QCM that was primarily targeting Aphria, also contained negative allegations against Liberty Health Sciences. This is also a factor that held down the LHSIF share price in the short-term. On February 19, 2019, Aphria announced that they were going to exercise their option terminate their LHSIF share agreement early. The Board referred to LHSIF as a non essential holding of APHA and received $47.4M (within an additional $10M based on certain thresholds being met).

The connection between Aphria and Liberty Health Sciences has now been completely removed. Any potential partner that was concerned about having to deal with large minority shareholder, such as Aphria, in a takeover scenario will no longer have that concern. In addition, any negative stigma that associated APHA and LHSIF including actual or perceived conflicts, has now been removed. The company now is simply an LP which can be evaluated on fundamentals or prospective growth, rather than be tied to the complexities of their relationship with Aphria.

Overall Takeaway

Liberty Health Sciences is becoming a well established LP in the state of Florida and could be considered relatively undervalued in relation to their competitors in Florida. It is now more than ever going to be open to a takeover or merger from a non TSX  listed company or U.S. MSO.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

 

Disclosure: I am/we are long LHSIF.