I’d like to share two recent CBD-related items. To start, Cannabis Wire reported (link) that the Consumer Brands Association, a large trade association for the food industry, has launched an initiative to push for federal clarity and regulation for CBD consumer products. (link; in particular, note their report). As the hemp industry is well aware, although a robust legal market has been built, the overhang created from a lack of FDA guidance, as well as the mishmosh of state rules, has held back the industry. Hopefully this step by a major trade group outside of cannabis can help move the ball forward for everyone.
Unrelatedly, Aurora Cannabis, a Canadian LP, announced yesterday that it is acquiring Reliva, LLC, a retail play on hemp-derived CBD within the US. (link) According to the press release, Aurora is paying about US$40mm in Aurora stock, with an earnout of up to US$45mm, payable in stock and/or cash.
There are a few things to note about this. First, this is an all-stock deal, continuing the trend of transactions getting done with little or no cash. Although M&A activity is down this year relative to last year, deals are still happening, while preservation of capital is still top of mind. Second, based on reports of Reliva’s last twelve month revenues being C$14mm, that would price the deal between 4.0x revenues (assuming no earnout is earned) to 8.5x revenues (assuming the earnout is paid in full).
Finally, the deal includes an earnout, which is sort of a delayed purchase price, contingent upon the business hitting certain financial/growth metrics (e.g., EBITDA, net income) post-closing. For the buyer, an earnout is a tool to reduce the initial amount paid and place a check on the target’s ability to continue to perform as projected. Similarly, the earnout allows a seller to retain some upside in the business, particularly if the combination is accretive overall (sometimes lovingly referred to as schmuck insurance). This could also be done with the seller keeping some of the equity, but the earnout allows for more of a clean break between buyer and seller, since now the seller only has economics left, without the voting rights of equity. Earnouts are simple in concept and complex to get right, but can be a useful way to strike a balance on purchase price.