Following cancelation of the deal for merging Brown Hotels into it, stock exchange shell Herodium (TASE: HROD) has found an interesting alternative: cannabis company Panaxia. Herodium's share price zoomed 80% following the announcement, pushing the company's market cap up to NIS 30 million.
The deal involves merging 100% of Panaxia's Israeli activity into Herodium in exchange for 75% of Herodium, which will be given to Panaxia's existing shareholders. If the cash in Herodium's treasury is less than NIS 22.5 million when the deal is completed, Panaxia's current shareholders will receive additional shares in Herodium. If cannabis exports from Israel are approved, the Panaxia shareholders' combined stake in Herodiu will rise from 75% to 85%, and to 90% when initial commercial sales in Europe are completed.
Panaxia was founded by CEO Dr. Dadi Segal, Dr. Eran Goldberg, and Adv. Assi Rotbart as a spinoff of pharmacy company Tree of Life, founded by Segal's parents. Panaxia has a cannabis products production facility - one of only two approved facilities for cannabis production under the new cannabis reform (the other belongs to Breath of Life (BOL) Pharma). When the reform is completed, only cannabis produced in an approved facility will be approved for marketing in Israel. Before the approved facility was launched, Panaxia already produced cannabis under the old regulations for nine years.
Two of the three cannabis products currently marketed in pharmacies in Israel (as required under the reform) are made by Panaxia. Axiban is marketed by Rafa and produced from an active ingredient made by Seach, and Cannareet is marketed by Cann10 and also produced from Seach's active ingredient (the third product in pharmacies is produced and marketed by BOL). Panaxia also produces cannabis products marketed under the pre-reform regulations by existing growers, including Canndoc (now InterCure Ltd. (TASE: INCR-L)), Seach, Teva Adir, and others.
One month from now, a prospectus will be submitted giving the volume of the company's activity. The Israeli cannabis market is estimated at NIS 50 million annually. The profit is shared by the pharmacy, the marketer, the manufacturer, and the grower, but higher in the value chain, the company's share increases (meaning that the manufacturer is likely to earn more than the grower). It therefore follows that Israel does not currently constitute a market of more than a few million dollars for Panaxia. The market, however, is likely to expand when the reform is implemented and the number of doctors authorized to prescribe the product increases.
If exports of cannabis from Israel are approved, Panaxia will be in an excellent position to take advantage of this, because in addition to its activity in Israel, it builds cannabis production facilities outside of Israel, and has already built three facilities in the US. This activity will not be merged into Herodium because of US regulations.
"We hope that our activity outside the US will be based on production in Israel and will be included in the TASE-listed company," Segal said today. "It is still not completely clear what will happen if exports are not approved and we have to set up additional facilities overseas outside the US in order to market outside the US, but we very much hope that we will not have to deal with this question."
The current deal follows the now canceled deal for merging the activity of Brown Hotels into Herodium, apparently because the hotel chain had second thoughts. Herodium announced at the time that upon signing the detailed agreement, the Brown Hotels owners would provide financial statements and "a valuation of over NIS 325 million for the activity by a recognized assessor." "Globes" subsequently revealed that investment banker Roee Eizenman had presented an obstacle to the deal by sending a letter demanding 6% of the merged company as an agent's fee. Eizenman introduced the Brown Hotel chain owners to Herodium controlling shareholder and CEO Roy Tamari. Herodium responded by rejecting the claims and demands, "which are an attempt to illegally extort money."
Another important reason for the cancellation of the agreement was lack of approval from Hachshara Insurance, controlled by Eli Elezra. In June Hachshara provided up to NIS 60 million in financing to the Brown Hotels chain in a deal designed to make it a partner in the chain and give it a holding of up to 20% according to a company value of NIS 300 million, after money.
Published by Globes, Israel business news - en.globes.co.il - on November 27, 2018
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