Zenabis Global Inc. did the unlikely Tuesday: The cannabis firm raised money with out going to a gaggle of hedge funds in Canada that deploy aggressive buying and selling methods to recycle capital in the pot business.
Zenabis opted to ink a C$30 million ($22.9 million U.S.) cannabis supply deal with rival producer Tilray Inc.
on Monday, as an alternative of hanging a financing cope with a hedge fund that it knew was shorting its inventory forward of the capital increase. The outcome, although, was combined, with its Canadian shares
closing up four.three% and its U.S. shares
“We thought we could do something that was non-dilutive but was larger than the market had seen before,” Zenabis Chief Executive Andrew Grieve stated in a phone interview with MarketWatch. Grieve did not disclose how a lot pot Tilray deliberate to purchase, simply that it can be at a “discount” and that Zenabis will get the money up entrance.
Capital was, and continues to be, troublesome to acquire for cannabis corporations, which have typically been pressured to swallow offers that closely favor financiers prepared to place up the money, a number of sources in the cannabis business have stated. Gotham Green Partners’ $250 million mortgage to MedMen, which primarily permits Gotham Green to personal MedMen’s belongings if it defaults on a cost, is one such instance of onerous phrases buyers are capable of extract from pot corporations.
Cannabis Watch: See all of MarketWatch’s cannabis coverage
“[The hedge funds] perform an essential market function, where you have an industry that doesn’t yet have long-only institutional investors for midcap stocks,” Grieve stated. “So, if I could go to [the Canada Pension Plan] and convince them to take a long position in the company, then these hedge funds wouldn’t be in this market. But it doesn’t exist yet … As a result, the hedge funds who work in our industry perform the function of providing a liquidity bridge.”
In Zenabis’s case, the financing from Tilray allowed it to keep away from taking money from buyers who have been shorting its inventory forward of a possible capital increase, sources stated, and Grieve confirmed. Shorting a inventory in the U.S. includes borrowing shares to promote in the open market after which returning the loaned inventory at a later date, which may become profitable if a inventory falls. Shorting a inventory with out first borrowing the shares, referred to as a unadorned brief place, is essentially unlawful in the U.S.
Hedge funds concerned in financing cannabis corporations will typically brief a inventory forward of a capital increase, understanding that the dilutive results of extra shares are more likely to lower the per-share worth and that recent shares might be procured from the firm to cowl any bare brief guess. It is a strategy for several hedge funds and pools of capital in Canada, and whereas executives perceive the tactic, they’re beginning to search methods round it.
“They take a risk, because if they go and put on a massive short position and someone like me finds an innovative solution that doesn’t require their capital, then they might be harmed, having taken on that short position,” Grieve stated.
Since February, the variety of shares shorting Zenabis has elevated by greater than three,000% to 1,795,970 shares, or roughly 2.1% of the float, in response to FactSet. The brief place elevated by almost an element of 10 since April. Now, with the financing from Tilray, it’s not clear what buyers who’ve opened a brief place will do since they possible anticipated to cowl the brief commerce with inventory purchased from the firm.
Zenabis additionally announced Tuesday that it was restructuring a few of its convertible debt, giving it extra time to repay the mortgage. It additionally issued C$12.5 million in warrants, which possible contributed to Tuesday’s uneven buying and selling session.
If Zenabis inventory continues to climb, it may also assist with its convertible debt, which the Globe and Mail reported is a matter that plagues the sector. GMP Securities analyst Justin Keywood wrote in a Tuesday observe to shoppers that the financing mixed with the restructuring of a few of Zenabis’s convertible debt addresses a “financing overhang.”
“As a result, an overhang is being removed, leading to a rerating in valuation and consistent with our investment thesis,” Keywood wrote in the observe. “We expect [Zenabis] to continue executing on its expansion plans, where it could become a top five Canadian LP supplier with strong partner feedback to support this goal.”
A information to pot shares: What you need to know to invest in cannabis companies
Keywood famous that Zenabis is valued “well below peers.” The analyst has a purchase on the identify with a C$three.25 goal worth.
Zenabis’s Canada-traded inventory has fallen 69% this yr; Tilray shares have dropped 30% whereas the S&P 500 index
has gained 18.three%. The Horizons Marijuana Life Sciences ETF
has gained 27% in 2019.