CannTrust in discussions with beverage companies over pot

CannTrust Holdings Inc. is in active discussions with potential partners in the beverage, cosmetics and food industries and expects to announce a deal in the next two months, according to the cannabis company’s chairman.

“I would be really in shock if we don’t announce some major deal in the next 60 days,” Eric Paul said in a phone interview. Toronto-listed CannTrust also plans to trade on a major U.S. exchange shortly, he added.

The stock jumped as much as 7 per cent, and was up 5.5 per cent to $12.70 at 1 p.m. in Toronto.

The former chief executive officer stepped down on Oct. 1 and was named chairman and special adviser to CannTrust’s management team. He’ll be replaced by Peter Aceto, former CEO of Tangerine Bank, the lender owned by Bank of Nova Scotia.

CannTrust, based in the Toronto suburb of Vaughan, hopes to clinch several partnerships -- as opposed to one big deal like Constellation Brands Inc.’s $5 billion investment in Canopy Growth Corp. That deal gives the beverage company the right to take a majority stake in Canopy if it chooses to exercise all its warrants.

“I’m not saying it’s not a good strategy, but ideally it would be great to have a bunch of brand partners,” Paul said. “We’d like to find the best partner for every one of those verticals.”

With eight buys, no holds or sells, CannTrust is often cited as a top pick by analysts and investors in the cannabis industry. However, its valuation hasn’t reached the towering heights of some of its peers, with a price to 2019 sales ratio of just 6.17 compared to 89.53 for Tilray Inc., according to data compiled by Bloomberg. Its market cap of US$960 million is dwarfed by Tilray’s US$14 billion.

“They’re like the anti-promotion company, which in some respects is very frustrating because you’d like to see your stock go up more,” said John O’Connell, CEO of Toronto-based Davis Rea Ltd., which counts CannTrust as its only cannabis investment. “But as far as we can tell, this is the only company that’s really operating in a businesslike manner.”

Paul, 77, a former president at Canadian discount chain Zellers, is highly skeptical of the hype surrounding the industry. Valuations have soared since the Constellation deal, and he believes it’s “far more brutal than anybody realizes.”

“There may be half a dozen major players standing three years out and that’s it,” he said. “What are the other 110 going to be? They’re going to be bankrupt or out of business because their business models don’t work.”

The main thing that will distinguish the winners from the losers is their production costs, and Paul believes CannTrust will have some of the lowest in the industry through the use of high-tech greenhouses and contracting out to farmers in Ontario’s Niagara region. While indoor grow operations can have costs of $1.80 to $2 a gram, Paul said CannTrust’s outdoor growing costs will be as low as 25 cents a gram.

Low Costs

Low costs will be essential to keeping medical marijuana users from flocking to the recreational market when it’s legalized in Canada on Oct. 17. CannTrust said last week that it serves 50,000 medical patients and is capturing 36 per cent of all newly registered patients in Canada, according to government data.

However, recreational pot will sell for a lower cost than medical pot, and most patients are paying out of pocket because their insurance doesn’t cover cannabis. CannTrust has promised its patients that it will match the recreational price and cover the excise tax.

The main question for CannTrust is whether its relatively low valuation will make it a target, said Greg Taylor, who holds the company as one of the top three positions in the Purpose Marijuana Opportunities Fund.

“To me it should be a takeover target at these levels as the space consolidates,” Taylor said.

Paul said he worries about that, but believes the only company with the clout to succeed is Canopy, with its hefty balance sheet. Paul is CannTrust’s largest shareholder, with an 11.5 per cent stake, according to Bloomberg data.

“There’s nobody’s paper I would take in this industry, it’s all garbage,” he said. He added he could fend off most takeover bids. “But if someone like Canopy came along, I don’t think I could defend the company.”

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.