Tikun Olam valuation slashed in Cannbit deal

Tikun Olam cannabis greenhouse
Tikun Olam cannabis greenhouse

Cannbit will pay $23 million immediately plus 4.99% of its shares for Tikun Olam's Israel activity, plus $18 million conditional on revenue.

Cannbit, listed on the Tel Aviv Stock Exchange (TASE), announced today the completion of a deal to acquire the Israeli activity of privately owned cannabis company Tikun Olam. Cannbit will pay $23 million immediately and 4.99% of its shares (Cannbit's market cap today is NIS 246 million, so the shares are worth NIS 12.3 million ($3.5 million)).

Cannbit will also pay $18 million more if it reaches NIS 1 billion revenue within five years. In its announcement to the TASE, Cannbit explained that it would pay only $23 million, not $42 million, as written in the memorandum of understanding signed by the companies, because Cannbit had undertaken to pay the rest of the cost for building the production plant in the Tsiporit Industrial Zone. Under the original agreement, Tikun Olam was to have been responsible for building the plant. Although Tikun Olam estimated the necessary investment for the plant at $2.5 million, the difference in the company value is $19 million.

This price is much lower than the $100 million for which Tikun Olam initially sought to sell its Israeli activity. A valuation attached to the deal gave a $31 million value for the activity.

Tikun Olam owner Yitzhak (Tzachi) Cohen was forced to sell the successful international cannabis company's Israeli activity when the Ministry of Health asserted that he was not eligible to be a party at interest in a cannabis company because of police intelligence information about his ties with a criminal organization. Although he was not tried, and the evidence was not presented to the company, Cohen agreed to sell the Israeli activity. During the interim period in which Tikun Olam's activity was partially suspended because of the legal situation, it lost its leading position in the market. Its products have been returning to the shelves in recent months, but competition is much stiffer.

This is probably the reason that the price that Cohen will eventually receive for the company is lower than he initially sought. The competitive field in the Israeli cannabis market has changed; the cannabit reform has already opened the market to additional companies besides the eight that have been operating since 2008-2009. Cannbit itself has approval for marketing its products, making it less dependent on an agreement with Tikun Olam, Nevertheless, the large and advanced plant now being built in Tsiporit is still viewed in the market as an important asset.

In addition to lowering the price and giving responsibility for building the Tsiporit plant to Cannbit, the agreement also contains another surprise - Cannbit will also receive a franchise to sell Tikun Olam's products in France and Poland in exchange for royalties. Another change in the agreement from the memorandum of understanding is that Cannbit will pay Tikun Olam 3.2% of its net revenue, compared with 5% of the revenue resulting specifically from Tikun Olam's strains in the memorandum of understanding.

Published by Globes, Israel business news - en.globes.co.il - on November 25, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Tikun Olam cannabis greenhouse
Tikun Olam cannabis greenhouse
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