SPECULATION that Cellular Goods was on the verge of being acquired has been swirling since early August when rumours of a looming deal saw its share price jump 40%, adding millions to its market capitalisation.
Eight weeks later and Cellular Goods has all but confirmed the rumours, announcing plans for a major acquisition deal with UK CBD stablemate Cannaray Limited worth £18.6m.
Despite expectations the young company would simply be bought out, the deal will be more of a merger, allowing Cellular Goods access to the reach it has been struggling to attain since launching its first products late last year, and crucially allowing Cannaray to list its shares publicly for the first time.
The move marks a major shift in direction for both parties, and marks the beginning of what Cellular Goods’ new interim CEO Darcy Taylor believes could be widespread consolidation in the CBD industry.
“The industry is currently defined by a large number of small companies, which can lead to confusion among consumers… and a lack of trust in the industry. We believe the market will consolidate and hope to benefit from a first-mover advantage.”
The Deal
On Monday, September 26, Cellular Goods informed investors in an RNS that it had signed a letter of intent (LOI) with Cannaray Limited, which owns subsidiaries Cannaray Brands and Love CBD Health.
Under the proposed deal, reportedly at an ‘advanced stage’ of discussions, Cellular Goods will acquire 100% of the issued share capital of both Cannaray Brands and Love CBD.
It is understood that Cellular Goods will pay £14.2m to Cannaray: £1m in cash and the rest in ‘a number of new Cellular shares’, yet to be issued.
Asked to provide details on how this figure will be met, considering Cellular Goods’ market cap is now around £10m, Mr Taylor told BusinessCann: “The cash involved in the deal will not exceed £1m. As Cellular Goods is listed, we are unable to disclose any further information than was included in the announcement to the market.”
This share transaction will leave Cannaray with a majority 54% stake in the newly combined entity. Should the deal go ahead, Cannaray will also be offered additional performance-based share payments.
Should its subsidiaries generate over £5m in revenues during the first year, Cannaray’s stake will rise to 61%, rising to 64% if £7.5m in sales are achieved, making the deal worth a potential £18.6m according to the company.
Not only will Cannaray take a controlling stake in the new company, seeing it ‘appoint the majority of the ongoing CBX board of directors’, but also it will enable its subsidiaries to list on the London Stock Exchange via a reverse takeover.
According to a separate release from Cannaray, it has been targeting a listing on the LSE since it was founded three years ago, and this deal ‘marks a leap forward for Cannaray Limited’.
Following the deal, Cannaray looks to be aiming to split its business, stating that it will then ‘be exclusively focused’ on growing its medical cannabis division Therismos across Europe.
Andrew Garden, Chairman of Cannaray Limited, said: “It has always been the intention of Cannaray Limited to list the business on a favourable stock exchange.
“We are excited to list our CBD division on the LSE via this reverse takeover with Cellular Goods, whilst we continue to privately build our medical and recreational cannabis businesses across Europe. Our intention for the future will be to list on a qualified exchange favourable for recreational THC businesses.”
Change in Direction
For Cellular Goods, the deal would provide a possible solution to the roadblocks it has faced since going public last year.
Firstly, the company’s CEO, Anna Chokina, who took the helm in December last year, has ‘resigned from the company with immediate effect’, seeing current Non-Executive Chairman Mr Taylor take over as interim CEO and lead the merger discussions, until a ‘new management structure’ is announced in due course.
Ms Chokina’s departure is expected to receive a mixed reaction from investors. On the one hand, she is credited with drastically overhauling the makeup of the board during her nine-month stint as CEO, replacing numerous celebrity directors, brought on to help bring investors onboard during its IPO process, with beauty and cosmetic industry veterans.
On the other hand, her own reliance on experience within the beauty and cosmetics industry has been a contributing factor in the company’s recent revenue struggles.
During an interview with BusinessCann earlier this year Ms Chokina said she had ‘no idea coming into this role’ of the online advertising blockade, which continues to dog CBD businesses across the UK.
This barrier to advertising has repeatedly been cited by Cellular Goods as a major and ‘unexpected’ drag on its revenues.
Furthermore, the company’s failure to be approved by the FSA to sell ingestible CBD products in the UK effectively cut the brand’s product line in half overnight, leaving it with little choice other than to double-down on its cosmetics range.
Now, however, Cannaray’s existing operations look to offer Cellular Goods a route through these issues. Cannaray CBD is featured on the FSA’s Public List, and is sold in 1,500 retailers throughout the UK, including upmarket department store Harrods, a key target for Cellular Goods’ premium offering.
Mr Taylor said: “The enlarged company stands to benefit hugely from Cannaray’s significant range of impressive consumer products, and the Cellular Board is delighted to be bringing together two complementary businesses with established brands in the market.
“We will seek to leverage the brand strength and portfolios of both companies as we continue the path to becoming the sector leader spurred by the combined strength of product lines that will result from the landmark deal.”
He added that the company will continue to pursue ingestibles, stating that they ‘continue to be a part of Cellular Goods’ long-term strategy’.
“Moreover, if the transaction proceeds, the enlarged company will benefit from synergies generated by Cannaray Subsidiaries’ two leading CBD consumer brands Cannaray CBD and Love CBD.
“As Cellular’s mission is to be a holistic cannabinoid wellness brand, these synergies in ingestibles will complement our work across our other ranges such as skincare and our recent focus on the Cellular Look Better range. This holistic focus supports a strong footprint across the cannabinoid wellness market befitting of the combined entity’s significant market presence.”
