Left at the altar, Newstrike puts hope in brand
It’s never easy being left at the altar, but for cannabis company Newstrike Resources Ltd., the pain could be relatively short-lived.
Within hours of being publicly dropped by would-be suitor CanniMed Therapeutics Inc. early Wednesday morning — for a $9.5 million termination fee — Newstrike CEO Jay Wilgar was fielding calls from investment bankers.
By mid-afternoon, the company had locked up $50 million in financing, and by early evening they’d secured $30 million more.
“We had non-stop phone calls coming in from investment banks, it was crazy,” said Wilgar, who secured the financing from a consortium of underwriters including INFOR Financial Inc., Cormark Securities Inc., Eight Capital Inc. and Haywood Securities Inc. “It got to the point where we literally had several of them argue over what size each got to take.”
The financing wasn’t cheap. By issuing shares at $1.32, the bankers received an 11 per cent discount to Newstrike’s Wednesday closing price of $1.47, on top of six per cent underwriting fees.
But to keep that in perspective, Newstrike’s shares were trading below 60 cents less than a month ago.
The raise gives the company a much-needed cash infusion, after months watching from the sidelines as industry giant Aurora Cannabis Inc. first disrupted its friendly merger talks with CanniMed, then walked off with its would-be partner.
“(Newstrike’s) been incredibly distracted over the last six or eight months, and they weren’t able to raise capital during that period,” said a source close to Wednesday’s financing deal. “You’ve had this massive run up in all the stocks, but they haven’t been able to issue capital while everybody else has. So the moment the news came down …. It was the right time to put capital into them and allow them to pursue their growth strategy.”
“I can tell you that every bank that traffics in the space would have approached them,” the source added.
Despite the discounted price Newstrike had to offer to secure financing, the speed with which investment bankers were scrambling to get in on the action suggests that company can’t be counted out yet.
With only 2,500 kilograms of current production capacity, the company is a small player in a market increasingly dominated by a handful of massive producers. That said, Newstrike recently secured a coveted sales licence, and it plans to have up to 28,000 kilograms of annual capacity online by next year, said Wilgar.
Most important, said the investment source, the company retains a strong recreational brand backed by the band the Tragically Hip.
“Molson Coors doesn’t tout the guy who grows their hops and barley. Ultimately this is a game about branding,” the source said, adding that imaginative marketing will be key in the Canadian recreational market where advertising is expected to be limited. “You can’t take out televisions ads, you can’t take out billboards, you can’t sponsor Formula One races. So how can you differentiate yourself? You creatively differentiate yourself.”
That’s the story Wilgar was pushing on Thursday. He plans to hone in on Ontario’s recreational market over the coming year, capitalizing on whatever advertising opportunities the LCBO allows and inking more branding deals with celebrities through the company’s partnership with the Feldman Agency, which represents clients ranging from Bryan Adams to Carly Rae Jepsen.
“We are going to be very prevalent in the music industry and in the music scene. Think about festivals, and anywhere we can use our brand to the fullest advantage,” said Wilgar.
Longer term, Wilgar envisions moving the company away from production and towards valueadded products. That could mean sourcing cannabis from other licensed producers, turning it into oil, and selling it at a branded premium, he said.
The morning after CanniMed and Aurora eloped, Wilgar wasn’t necessarily pleased. “We certainly didn’t invite Aurora to the party … (and) it wasn’t so much a divorce, as it was more kind of a forced split,” he said.
But, he added, “we always knew we had a great standalone story. I still think we do.”