Investors in Horizons ETFs’ HMMJ made money this week thanks to the largest Canadian cannabis acquisition to date – but its president believes MedReleaf may have cashed out too early.
Co-CEO Steve Hawkins said he was not surprised by the takeover and that having worked closely with MedReleaf CEO Neil Closner, he could tell the “writing was on the wall” and that discussions were taking place in the background.
Aurora on Monday announced they had agreed to buy MedReleaf for about $3.2 billion in a deal that means it will reportedly be capable of producing more than 570,000 kilograms of marijuana a year.
MedReleaf is the second largest holding in Horizons’ HMMJ – the world’s first weed ETF - behind only Canopy Growth and marginally ahead of Aurora. Hawkins said this week’s price boost showed the value of passive investing in the fledgling space but that, while the deal was a good one for Aurora, he was disappointed “a very promising enterprise” had decided to cash in its chips.
He said: “I thought MedReleaf had a lot of very positive prospects and I think that they possibly cashed out a little too early. And just from a growing industry perspective, I like more line items and more names available for future takeout from the liquor companies and tobacco companies, who I think will come into this space and pay much higher multiples than a consolidation of one cannabis provider over another.
“We would have made more money as an HMMJ unit holder in the long term if the company had stayed away as a standalone entity.”
Hawkins said that when the transaction closes, it will naturally affect the concentration in the HMMJ portfolio as it will lose one of its highest-weighted securities. He admits this could be positive or negative depending on the performance of the other companies, which will subsequently get a greater share of the pie.
He said: “I like more names in the portfolio than less names - that’s where I’m looking at it from. MedReleaf was our second largest holding in the portfolio after Canopy, right in line with Aurora, GW and Aphria from a weighting perspective. We had five companies that were about 10% weighting, now we’re only going to have four.
“That just means we are going to be putting more weight on the smaller market cap companies because we are a market cap index. Cronos (6.7%) will probably have 2% of the portfolio allocated to it that wouldn’t have otherwise been there. That could be very positive or negative depending on the news on Cronos.”
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