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Cannaray’s £18.6m RTO Deal With Cellular Goods Scrapped Over ‘Decrease In Share Price’

YESTERDAY morning Cellular Goods informed investors that its proposed £18.6m reverse-takeover deal with Cannaray has been scrapped.

In a brief RNS, the CBD retailer said it had ‘terminated negotiations in relation to the transaction’, first announced in September last year.

Cannaray has informed BusinessCann that the deal has been pulled due to the ‘decrease in Cellular Goods’ share price’ since its initial negotiations.

The news sent Cellular Goods’ already heavily depressed share price plummeting further throughout the day yesterday to hit lows of 0.54p at the time of writing.

With the proposed deal seen as a life jacket for the struggling company, providing Cellular Goods with a much-needed access to capital, marketing and a supply chain to expand its lacklustre sales, questions are now being raised over the company’s future.

Termination of deal

On Wednesday, February 8, Cellular Goods published an RNS stating that the acquisition had been scrapped ‘as a result of changes in the deal itself’.

In a statement to BusinessCann, Cellular Goods said: “As discussions over the transaction progressed, we were unable to reach an agreement with Cannaray on final deal terms on the asset to be acquired. It became clear that the deal was not in either company’s interests, and would not deliver long-term value to our shareholders.”

While it gave little detail as to why the deal would no longer suit either company, Cannaray explained in a separate statement: “The proposed deal was announced on 26th September 2022 in a press release that outlined the respective shareholder ratios of a future Enlarged Group.

“The subsequent decrease in the Cellular Goods share price meant that a deal, at those ratios, would not be in the interests of Cannaray Limited shareholders. Cannaray Limited and Cellular Goods could not agree revised deal terms during further negotiations. Cannaray wish the Cellular Goods team well for the future.

“The Cannaray team are focused on delivering another year of strong growth in 2023 across both wellness CBD and medical cannabis divisions. Within Cannaray Brands, Net Sales for January 2023 grew by over 100% versus January 2022.

“The Cannaray Board continues to prioritise maximising shareholder value, including by exploring public listings and M&A.”

Since the deal was announced, Cellular Goods’ share price has fallen nearly 80%, seeing its market cap fall from £10m to just £2.7m at the time of writing.

BusinessCann reported in September last year that Cellular Goods had signed a letter of intent (LOI) with its UK CBD stablemate Cannaray Limited.

The deal, said at the time to be in the ‘advanced stages’, was set to see Cellular Goods acquire 100% of Cannaray Limited’s subsidiaries Cannaray Brands and Love CBD Health.

Cellular Goods would have paid Cannaray £14.2m for the acquisition upfront, with the value of the deal reportedly rising to £18.6m if the subsidiaries recorded sales above £7.5m in the first year.

According to its press release, £1m in cash would have been paid upfront, while the other £13.2m would be raised by issuing ‘a number of new Cellular shares’.

This would have resulted in Cannaray, a much larger brand in terms of revenue, taking a 54% stake in the newly combined entity, while offering it a route to trade its shares on the London Stock Exchange without undergoing the costly and cumbersome IPO process.

Share price decline 

At the end of December, Cellular Goods revealed that its full year results for the year ended August 2022 were just £28.9k.

While this represented sales from December 2021 only, when the company first launched its product range, it suggested that sales since February, which Cellular Goods previously described as ‘disappointing’, had slowed, totalling £15.8k in the six months from February to August.

Furthermore, the company’s total loss for the year nearly doubled from £3.3m to £5.9m, while its total assets halved from £10.5m in 2021 to £4.8m.

This news accelerated Cellular Goods’ stock price decline, which has dropped from 2.3p in September to around 0.5p. 

Its share price decline has been exacerbated by the continued divestment of shares by major shareholder Durban Holdings Limited, which owned 75.5m shares in the company on April 4, 2022, representing a near 15% stake.

Durban then sold around 10m shares in May, seeing its stake in the company drop to just under 13%.

Since then, Durban has accelerated its divestments, selling over 40m shares between November 2 and January 30 on eight separate occasions (five in January alone), to see its holding reduced to just under 5%.

Looking Ahead

Asked by BusinessCann what its next steps were now the deal had fallen through, it said: “We will continue to evaluate strategic opportunities, both to develop and expand our business model, and generate value for our shareholders.

“Our age-prevention skincare and Rejuvenating lines have shown positive momentum in Q1 this year, and supermodel Helena Christensen continues to promote our products, which gives us increased access to the age-prevention skincare market.

“We are in positive communications with potential retail partners and anticipate expanding our existing sales channels this year, and continue to review Cellular’s product range, proposition, and opportunities in the market.

“We are keeping a tight rein on costs, our previous cost reductions of 56% followed a major streamlining programme. We continue to look for efficiencies in our operations on an ongoing basis.”

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