During the last year, the cannabidiol (CBD) industry has been under pressure and we believe that the market has become saturated with new brands.
In early 2019, several CBD companies were being assigned unicorn valuations ($1+ billion) as investors piled into these businesses. The CBD sector was driven higher by hype and by the prospects of a household name like Coca-Cola (KO) entering the industry through strategic acquisitions.
Fast forward to today and the leading CBD brand, Charlotte’s Web Holdings, Inc. (CWEB.TO) is valued at approx. $500 million while other CBD brands are trading at a significantly lower valuation.
Although the CBD industry has come off its highs from 2019, the sector continues to be an attractive growth market. According to the Brightfield Group, the global CBD market is expected to be as large as US$24 billion by 2025.
During the last month, we noticed an increase in activity in the CBD industry and this caught our attention. Today, we want to highlight 2 CBD companies that have benefited from this trend and will continue to monitor these opportunities.
Charlotte’s Web Holdings: An Industry Leader
Last week, Charlotte’s Web Holdings, Inc. (CWEB.TO) (CWBHF) significantly strengthen its balance sheet and reported to have completed a C$77.625 million equity financing. Following the completion of the private placement, the company is fully funded and well positioned to execute on previously announced growth initiatives.
This is the largest capital raise of the year for a CBD company and Charlotte’s Web plans to use the proceeds to fund business development and for general working capital purposes. We are favorable on how the management team has been executing on the CBD market and expect the capital from the financing to play an important role in the growth of the business.
We believe that Charlotte’s Web is the most attractive investment in the CBD space and expect the previously announced acquisition of Abbacus to play an important role in continued growth. The company has an industry-leading brand, the largest network of retail partners, robust EBITDA margins due to vertical integration, and a best-in-class management team.
2020 has been a challenging year for Charlotte’s Web and the shares have been under considerable pressure so far this year. We believe that the business is in the early innings of a major growth cycle and are of the opinion that it is a top brand in the space.
Aurora Cannabis: Enters the US CBD Market Via Acquisition
Aurora Cannabis Inc. (ACB.TO) (ACB) recently enhanced its leverage to the CBD industry though the acquisition of a leading US brand and this is an opportunity that we have been closely following.
Last month, Aurora Cannabis acquired Reliva, a leader in the sale of hemp-derived CBD products in the United States. The transaction is expected to be immediately accretive to Aurora on an Adjusted EBITDA basis and we find this to be significant.
The transaction combines Aurora’s leading Canadian recreational brands, and Canadian and European medical market position with a leading US CBD brand. The deal represents the culmination of a multi-month strategic evaluation of the US hemp-derived CBD industry and the market seems to be excited about the acquisition.
The combined company is expected to be positioned as a leading player in the world’s largest cannabinoid market and we are bullish on the amount of value that can be created between the businesses. The transaction will create a large and diversified pure-play international cannabinoid company and we are favorable on what each company brings to the partnership.
We are excited about the acquisition is because it combines Aurora’s scientific and product innovation expertise with Reliva’s nation-wide distribution footprint and speed to market experience. The combined company will leverage Aurora’s existing scientific expertise to further advance cannabinoid product innovation, and we will monitor how Aurora is able to increase market share in the US.
Last month, Aurora Cannabis completed a reverse stock split and post-split trend has been volatile. Although the shares have come significantly off its May lows, the recent volatility has kept us cautious and we will monitor how the acquisition is able to support the growth of the business.