BMO in on $100 million financing deal for cannabis company Cronos

It’s the second deal BMO Nesbitt Burns has underwritten in the volatile marijuana sector

The Bank of Montreal is delving deeper into the cannabis sector, with investment banking subsidiary BMO Nesbitt Burns Inc. co-leading a $100 million bought deal for marijuana company Cronos Group Inc.

The deal, which was announced on Thursday and co-led by GMP Securities L.P., will see the underwriters acquire 10.4 million Cronos common shares, or 12 million if the over-allotment is taken, at a price of $9.60 a share. BMO’s involvement shows ongoing willingness, at least on the part of its investment banking division, to play in a volatile sector largely avoided by Canada’s biggest financial institutions.

BMO became the first of the “big five” Canadian banks to take part in cannabis industry financing when it co-led a $175-million bought deal, again with GMP, for Canopy Growth Corp. in January. For the most part, financing for cannabis companies has been led by smaller Bay Street firms like GMP or Canaccord Genuity Group Inc.

It’s unclear whether other large banks are gearing up to jump into cannabis capital markets, although the public signals they’re giving suggest it’s unlikely in the short term.

Bank of Nova Scotia spokesperson Rick Roth reiterated the bank’s position that “our priority is to manage risk…. Should there be significant change to industry legislation or regulation, we will revisit our risk assessment and make risk policy adjustments if warranted.”

A spokesperson for the Canadian Imperial Bank of Commerce said the bank’s position remained the same as it was in January: “As new regulations come into effect later this year, we are reviewing the legislation and determining next steps.”

Toronto Dominion Bank and the Royal Bank of Canada declined to comment.

For Cronos, which owns two Canadian licensed producers, Ontario-based Peace Naturals and B.C.-based Original BC Ltd., investment from a mainstream institution shores up its leading position in cannabis-industry financial markets. It follows a vote of confidence the company received from U.S. investors and regulators in late February, when it became the first Canadian cannabis company to list on the Nasdaq exchange.

It also follows two bought deals in the last six months, with $16.5 million raised in November and $46 million raised in January.

Despite their success raising capital, however, Cronos is still an early-stage company.

“For the 12 months ended December 31, 2017… the company currently anticipates reporting revenue of between $3.8 million and $4.4 million,” Cronos said in its prospectus, filed Wednesday for the BMO financing deal.

Cronos plans to spend $15 million of the proceeds from the latest financing deal on international capital expenditures. It is currently building a greenhouse and extraction lab facility in Israel, and recently announced plans for a facility in Australia.

In December, it sent its first shipment of medical cannabis to Germany, as part of a deal with German pharmaceutical manufacturer G. Pohl-Boskamp GmbH.

It intends to use “the remaining net proceeds of the offering for general working capital purposes, including working capital for the company’s international operations, and as capital on hand for potential new investment opportunities,” the company said in a news release on Thursday.

On Monday, the company announced a partnership with the MM Enterprises USA, LLC (MedMen Enterprises), a large U.S. dispensary chain with operations in several states. The 50-50 joint venture, which will be called MedMen Canada Inc., will bring MedMen branded products to Canada along with retail stores in the jurisdictions allowing private retail.

“MedMen Canada will have access to the (Cronos) production facilities while leveraging MedMen’s brand recognition. In addition, the company will be leveraging its regulatory expertise and know-how to obtain the requisite licenses, approvals and permits from Health Canada for MedMen Canada to commence its operations,” Cronos said in its prospectus.

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