Merger points to demise of Israel’s best-known cannabis brand

Last week, Tikun Olam-Cannbit Pharmaceuticals (TASE: TKUN) made an announcement heralding the end of the company as a pure cannabis player, and possibly the end of the road in Israel for what until not so long ago was considered the country’s leading cannabis brand. The company, which is currently controlled by the family of real estate developer Barak Rosen (Israel Canada), has announced an agreement under which several traditional industrial companies controlled by Ronen Elad will be merged, in return for the allocation of 60% of their shares.

The business being transferred, mainly Elad’s holdings of electric cable company Synergy Cables and food packaging materials company Plastopil Hazorea (TASE: PPIL), will be managed together with Tikun Olam-Cannbit in the faded cannabis business (“after the restructuring of this activity and Elad will become the controlling shareholder of the merged company. All of Tikun Olam-Cannbit’s current employees (including CEO Ifat Kariv and President Eitan Ben-Eliahu) will leave, to be replaced by people hired by Elad.

Today, when the Tikun Olam-Cannbit is trading at the ridiculous market value of NIS 25 million ($7 million), it’s hard to believe that less than four years ago it was offered for sale at a price of $100 million. But since then, there have been dramatic changes for the worse both in the company itself and in the medical cannabis market as a whole. The Tikun Olam-Cannbit story is another example of market chaos, which never managed to develop the way it predicted when it was at its peak, in 2019.

Tikun Olam pioneered the medical cannabis industry in Israel when it started in 2005. At the time, the business was still dubious, plants were grown in pots, and clients were treated at the home of the company’s owner at the time, Tzachi Cohen. The company continued to grow rapidly. It has developed strains of cannabis that have gained worldwide fame, conducted groundbreaking clinical trials, and sold the rights to some of its strains to the Canadian company MedRelief, in a deal that was very profitable for its owners.

The company continued to develop in the US, Europe and Australia as well, but after police allegations that Cohen had links to some problematic figures (claims that even without proving it in a court of law was enough for a license to carry cannabis to be withdrawn), he was forced to sell the business. cannabis in israel Cohen put Tikun Olam up for sale for $100 million, reflecting the buzz around cannabis stocks at the time, but in the end he had to agree to a much lower price.

The winner of Cohen’s auction for Tikun Olam was the young cannabis company Cannbit, led by Barack Rosen (whose son owns shares in the company). After Cannbit offered $42 million for the company in September 2019, with contingent add-ons, the company was eventually bought for just $23 million, plus $18 million in contingent payments that were ultimately never made.

At the time, an acute shortage of medical cannabis arose in the local market, in part due to the closure of the large Tikkun Olam farm in northern Israel (after allegations of quality problems), and the Ministry of Health decided to open the market to imports. This flooded the Israeli market with imported cannabis, which eventually led to the collapse of Tikun Olam-Cannbit’s business, and made it impossible for it to exploit its brand’s potential. Changes in market structure, combined with the blow to Tikun Olam’s image from the closure of the plantation and its delayed entry into activity under the new cannabis regulations, led to a sharp decline in its business and a 95% decline in its business. The share price is from the peak of 2019.

The company achieved record revenues of 49 million shekels in 2022, up 32% from the previous year, but it also recorded a loss of 48 million shekels. In 2019-2022, the company lost a total of NIS 110 million.

Tikun Olam’s auditors appended a business continuation warning to their report, and the company recently announced the closure of two cannabis farms and the layoffs of dozens of employees, leaving a factory in the Tsiburit Industrial Zone, a pharmacy, and a one-of-a-kind cannabis plant. Trademarks. An attempt to merge with another struggling cannabis company, BOL, was unsuccessful.

The planned merger depends, among other things, on the Ministry of Health’s approval of Ronen Gilad as the owner of the cannabis company, but that activity will become secondary in terms of the businesses that will absorb Tikun Olam in the merger, most of which take place in Migvan Technologies & Engineering Ltd, in which it owns Elad 65%.

Elad bought its stake in Synergy Cables from private equity firm Fortissimo in 2021 for a 12.5% ​​stake in Migvan. The company sells electricity cables in Israel and abroad and is an important supplier to the Israel Electric Corporation. According to Tikun Olam-Cannbit’s announcement, its revenues amounted to 434 million shekels in 2022 and it generated a net profit of 38 million shekels. Plastopil Hazorea, in which Elad has a direct stake of 18.6% and controls it with Kibbutz Hazorea, has a market capitalization of NIS 15 million. Tikun Olam-Cannbit will also absorb Migvan’s properties in Waisbord and Ronen Wolf, which distributes electrical and lighting components.

Published by Globes, Israel business news – en.globes.co.il – on June 15, 2023.

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