FT : SoundCloud on track for growth after financial rescue

SoundCloud on track for growth after financial rescue
User base rises in past three quarters as the music service focuses on new artists

SoundCloud, the online music streaming service, is exceeding financial and user growth targets less than a year after a $170m financial rescue took it back from the brink of collapse.

Kerry Trainor, the former chief executive of video site Vimeo who pulled together a fundraising deal in August with backing from Raine Group, the boutique US bank, and Temasek, Singapore’s state investment company, says SoundCloud made sales in 2017 that surpassed its annual goal of $100m. Crucially, after years of sluggish user growth, the user base rose in each of the past three quarters. 

While the company remains lossmaking and its long-term prospects uncertain, its user growth will encourage the music industry given the scale of the crisis at the group last summer. With months before it was expected to run out of cash, and having laid off 40 per cent of its staff, SoundCloud’s founders were faced with a choice: sell, or raise money and find a viable business model for the service that had been a driving force in music zeitgeist, but has been squeezed in a market dominated by Spotify and Apple. 

Mr Trainor convinced management and investors that SoundCloud was worth another shot and took over as chief executive from co-founder Alex Ljung, who became chairman. Seven months later, he says SoundCloud says the company “has never been healthier financially”. 

Still, he has his work cut out. SoundCloud rose to prominence as the “YouTube for audio” — an online home for artists and podcasters to post their work after early pioneer MySpace fell apart. The company, which was founded in Stockholm but then moved to Berlin, amassed hundreds of millions of users and remains a breeding ground for emerging talent, spawning new sub-genres of music. 

But in the era of digital music, SoundCloud has struggled to find its place and build a sustainable business model. The large record labels have latched on to streaming subscriptions as their chief moneymaker — a format that has brought billions back to the industry but is dominated by a few players: Spotify, Apple and Amazon. 

After being pressured to build its own subscription product, Mr Trainor says SoundCloud has switched gears an is no longer trying to mimic Spotify. Instead, the company wants to focus on its original market among the creators of music. SoundCloud sells tools to artists and podcasters, such as data on listener habits or extra storage, for between $70 and $100 a year.

The benefit to SoundCloud is twofold. These artists pay for the services, and they also post content that will draw listeners to the platform. Mr Trainor points to Soundcloud’s 177m tracks, which compares to the 40m song library offered by Spotify and virtually every other streaming service. He hopes this extra content, which includes mash-ups and DJ mixes, will set SoundCloud apart from a crowded pack of streaming services. 

Mr Trainor says that after last August’s funding round “we’ve significantly reduced the [cash] burn” and that the company recently achieved a few cash flow positive months.

The investment showed Soundcloud’s valuation had sunk to $150m, from $700m in 2014. However, the platform’s relevance has been rising, says Mark Mulligan, analyst at Midia Research. He points to “SoundCloud rap” — the term for a crop of emo-influenced rap artists who got their start on SoundCloud, and have invaded the US music charts.

“Artists were always SoundCloud’s core value, and that is how we need to measure its success,” he says. “How many people are starting their careers on SoundCloud? What SoundCloud needs to prove is it can be the most-used stepping stone between obscurity and stardom.”

The focus on higher-margin services for artists comes because SoundCloud’s subscription service has not gained significant traction. The company will not say how many people have signed up, but Mr Mulligan estimates about 100,000, compared to Spotify’s 71m.

He adds that SoundCloud’s best bet is “to get in good enough shape for Spotify to come knocking again,” after Spotify abandoned a deal in 2016. 

Mr Trainor says he is not focused on deals right now, but that he expects “we will potentially be of interest [to suitors]”. Spotify declined to comment but one person close to the streaming company says all focus has been on its public offering, although SoundCloud is “always the one that’s kind of out there”. 

That one of Europe’s most promising start-ups nearly ran out of cash is a testament to the tough economics of music streaming, just as Spotify is set to test its own unprofitable business model on the public markets on Tuesday.

But for the major labels, the more streaming services that exist, the better, as they want to avoid becoming wholly dependent on tech groups such as Apple and Google. “Obviously we want to see healthy [independent streaming companies] in the space,” says one senior label executive. “We want to see them win because [SoundCloud] really does fill a need. We like the bedroom artist nature of it . . . it’s a very different complexion than the YouTubes or Facebooks of the world.”

Mr Trainor, a 20-year veteran of the music business, is bullish. “There was a period, for literally over a decade, when no one was sure anyone would pay for music ever again,” he says. “It’s exciting to be able to forget that now.”

Barron's : A New A.I. Era Dawns for Chip Makers (AMD, NVDA, INTC,...)

A New A.I. Era Dawns for Chip Makers

Artificial intelligence is an absurdly popular buzzword, perhaps overused. But AI is about to become a lot more pervasive as the computer circuitry to perform AI grows more prevalent.

The desire to embed AI in just about anything has meant that more and more chip makers are racing to broadly diffuse their designs for circuitry that processes the algorithms that drive the software.

The relevant companies span the semiconductor industry. There is Nvidia (ticker: NVDA), already an AI star, whose graphics chips—graphics processing units, or GPUs—are used heavily by companies such as Alphabet’s (GOOGL) Google to perform machine-learning tasks in their data centers. There are much smaller companies, such as the $804 million market cap CEVA (CEVA), which licenses technology to chip makers, including Intel (INTC), for devices such as smartphones. In between, are companies such as Synopsys (SNPS) and Cadence Design Systems (CDNS) that make software tools used by semiconductor engineers to design chips; they are suddenly relevant in a new way by adding AI formulas to those tools. And there are small, private companies whose relevance to AI is just emerging, such as VeriSilicon, Videantis, AImotive, and T2M.

What could blow the AI chip market wide open is what’s known as IP, or intellectual property. Historically, a company such as Intel designed and built its chips from start to finish by itself. In the past two decades, that business model changed as more young companies emerged that didn’t manufacture finished chips. Instead, they provided a blueprint that can be used by vendors to make chips with specific features. The so-called IP companies licensed the blueprints to chip makers for a fee.

It’s a bit like the auto industry, where suppliers such as Delphi Technologies (DLPH) make specific auto parts, which they then sell to car manufacturers. Innovations engineered by the auto-parts makers can then flow to the auto companies.

CEVA is one of those companies; another is the U.K.’s privately held Imagination Technologies Group, which develops circuit designs that can display computer graphics on smartphone screens. Other chip makers license designs from Imagination, and don’t have to figure out the graphics algorithms themselves.

That licensing game is now coming to AI. Nvidia normally sells finished chips, like Intel, but last fall it did something very unusual: It published all the specifications for its AI circuitry, offering the designs free to anyone who wants them as “open source” technologies. It’s a bit like the Linux operating system, in which the software code is made freely available. Anyone can take Nvidia’s blueprints and produce their own chips using all Nvidia’s hard-earned intellectual work.

It’s not often that a very large chip maker such as Nvidia gives this much away, observes Mike Demler, a senior analyst with technology consultancy The Linley Group. Demler has reviewed Nvidia’s technology in depth, and has spent years looking at the offerings of CEVA and the other IP companies. “There’s a lot to say in Nvidia’s favor in this,” Demler tells Barron’s. “It’s significant that this IP design is coming from a chip company that already has developed very complex working silicon” in the form of finished chips, he says.

Moreover, for an established vendor to make its designs available as open source is unheard of, says Demler. “It’s going to definitely shake some things up” in AI chips. he says.

Nvidia last week announced a partnership with ARM Holdings, a U.K. company bought out two years ago by Japanese conglomerate SoftBank Group (9984.Japan). ARM is the original giant of IP licensing, and SoftBank’s purchase for $32 billion was a stunning acknowledgment that controlling chip IP may have incredible value.

The idea seems to be that ARM, which already has lots of IP, will license Nvidia’s blueprints to ARM’s licensees, which include just about everyone in the chip business, but also Apple (AAPL) and Samsung Electronics (005930.Korea).

For Nvidia, this strategy is driven by the prospect of establishing an industry standard for programming AI based on Nvidia’s blueprints. That might, in turn, attract even more AI scientists to devote more resources to Nvidia’s designs, fueling further chip sales.

A large part of the focus of Nvidia’s free blueprints, notes Demler, is on the Internet of Things, or IoT. That market potentially includes vastly more gadgets than there are PCs and phones, ranging from smart speakers such as Amazon’s Echo, to wearable gadgets like the Apple Watch, to self-driving cars. The biggest companies in that market, such as Amazon, Apple, and Tesla (TSLA), can make their own AI chips, but not every company has the giant R&D budgets the titans enjoy.

By spreading around designs for chips freely, Nvidia could help a thousand flowers bloom by creating a ready market for AI designs that proliferate throughout digital electronics.

Already, AI chip designs look like they’ll take off in this new IP environment. “The pace of evolution of AI technology is accelerating much faster than what we saw in the past,” says Demler. There’s constant innovation in AI algorithms, and, as he points out, AI can be much more broadly applicable to a variety of electronic devices, than functions such as drawing graphics on a screen.

It’s time to start thinking about a world where it’s relatively easy for every single device that computes to have a dash of AI tossed into it. The implications of that have yet to be imagined.

Barron's : Tencent, Alibaba Shares: Don’t Rush Back In

Tencent, Alibaba Shares: Don’t Rush Back In

Two years of torrid outperformance have rekindled in emerging markets investors the old dream of “decoupling.” That is, their asset class forges ahead even after much more expensive U.S. stock markets hit an inevitable correction. That’s a vain hope for now, judging by the punishment meted out lately to the Chinese internet stocks that have paced the emerging markets rally: Tencent Holdings and Alibaba Group Holding.
There are strong logical arguments for decoupling. Developing world economies are more stable than they used to be. The emerging markets index has shifted dramatically from commodity producers dependent on global prices to innovative companies whose destiny is in their own brains. Smartly managed private entities are elbowing aside lumbering state behemoths. Exports to the U.S. matter less every day.

Tencent (ticker: 700.Hong Kong), which dominates Chinese social media, and Alibaba (BABA), its first mover in e-commerce, exemplify those trends. Tencent shares have tripled over the past two years, Alibaba’s have doubled. Investors believe in more upside, eventually. “We are still bullish in the long run on Tencent and Alibaba,” says Bin Shi, head of China equities at UBS Asset Management. “There is still plenty of potential growth left from products and services such as mobile payment, financial services, and advertising.”

The shares have been hammered anyway during a distinctly made-in-America crisis catalyzed by Donald Trump’s trade bellicosity and Facebook’s (FB) data-leak scandal. Tencent’s shares are off 12% since the market implosion started on March 20; Alibaba’s, 10%. That’s dragged down emerging markets broadly, with the Vanguard FTSE Emerging Markets exchange-traded fund (VWO) losing about 4%.

The wise short-term course for investors is to hold the Tencent or Alibaba shares they have, but see how Trump’s trade war unfolds before adding on the dip, says Gil Luria, director of research at West Coast asset manager D.A. Davidson. The president’s promised $60 billion in tariffs on Chinese goods could do real harm to the domestic economy that feeds the online giants. “The inclination is to see any pullback in high-growth stocks like this as a buying opportunity. But that may be a knee-jerk reaction,” he says.

Paul Meeks, a celebrity fund manager at Merrill Lynch during the 1999-2001 tech bubble, downplays current analogies in China or elsewhere. “Back then, we had companies talking about Ebitda five years from now,” says Meeks, who today is chief investment officer at boutique investor Sloy, Dahl & Holst. “Today’s companies are growing like weeds and highly profitable.”

But he, too, is standing pat, at least until the next round of quarterly reports in May. “I love Alibaba and Tencent, but I’m not going to miss anything with all this saber rattling going on,” he remarks.

The weak link in the Chinese internet chain looks like search provider Baidu (BIDU), which has been less successful than its countrymen in opening new growth horizons, the investors say. “Baidu has targeted AI [artificial intelligence] as the next area for breakthrough, but it is a bit early to tell whether it will be successful or not,” UBS’ Shi says. The bank has a neutral stance on the shares.

The larger lesson is that emerging markets may keep outperforming if the rest of the world stays on an even keel, but they can’t be a haven in bearish times. Decoupling will have to wait.

BArron's : A New CEO Won’t Save Deutsche Bank’s Stock

A New CEO Won’t Save Deutsche Bank’s Stock

Could a new boss for Deutsche Bank help revive its beaten-up stock? News that Deutsche Bank Chairman Paul Achleitner has been hunting for another chief executive grabbed the financial industry’s attention during this past week. But just as it was looking premature at press time to organize farewell drinks for current CEO John Cryan, it could also be too soon to turn bullish on the beleaguered German bank’s shares.

In fact, analysts and investors are trotting out plenty of reasons to stay bearish on the stock (ticker: DBK.Germany), which keeps wallowing far below its 2007 peak, even as other financial giants have notched new highs in recent years. The shares are down about 30% this year, putting the company’s price-to-book ratio at 0.4, below even rival Commerzbank’s (CBK.Germany) 0.5.

The latest escalation of tensions between Achleitner and Cryan is just a piece of the Deutsche Bank puzzle. The maneuvering around the chief executive’s job has “intensified the uncertainty on the direction of the company,” warns CFRA analyst Firdaus Ibrahim in a note. He has reiterated his Sell rating on the stock and cut his price target to 10.50 euros ($12.97), implying a dip from the recent print around €11.

While investors might turn more hopeful with a new CEO, Cryan isn’t the problem, MainFirst analyst Daniel Regli tells Barron’s. Cryan’s task has turned out to be tougher than the market and analysts had expected. He was hired to streamline the bank, cut costs, work through legal troubles, and more. The British native and UBS veteran was named co-CEO in 2015 and sole CEO in 2016. That year brought a $7.2 billion fine from the U.S. Justice Department to settle mortgage-securities probes stemming from the financial crisis, along with a stock selloff sparked by fears around that fine.

What’s needed for a stock turnaround is stabilization of Deutsche Bank’s top line, says Regli, who has a Sell rating and a price target of €10.50. The bank has had revenue declines of 10% and 12% in the past two years, according to FactSet data. Management recently cautioned about a hit to first-quarter revenue at its securities business due to a strengthening euro. Some of the revenue slumps for its units have been tied to external factors, from currency headwinds to lower trading activity that’s been an industrywide challenge. A Wall Street Journal columnist once likened Deutsche to “a parched farmer praying for rain,” with the bank dependent on better markets for growth.

Another problem is that a C-suite change doesn’t look easy to pull off. Analysts have fretted about finding candidates for what’s been called the “toughest job in banking.” They’ve highlighted how Achleitner reportedly hasn’t been getting takers in talks with other banking bigwigs. The no-thank-yous inspired mock confusion from German business newspaper Handelsblatt: “So what is it that has them all running in the other direction? Is it the fact that Deutsche’s COO [Kim Hammonds] just called it the ‘most dysfunctional’ place she’s ever worked? Or could it be the drama surrounding bonuses? Or perhaps all the backstabbing and finger-pointing?”

A few big shareholders are reportedly impatient with Cryan, who said in a memo that he is “absolutely committed to the bank.” But other investors and analysts have argued that Achleitner deserves blame for the bank’s woes—and worry that a new CEO could make things worse.

Barron's : Marijuana Stocks Could Be a BuzzkillMarijuana Stocks Could Be a Buzzk

Marijuana Stocks Could Be a Buzzkill
A cold rain beat down recently on the boarded-up cinder-block homes and empty factories of Smiths Falls, Ontario, melting the last snows in this industrial town about an hour south of Ottawa. One parking lot was full, however. Inside a shuttered chocolate factory, it is artificial summer for the marijuana crop of the largest cannabis company in the world, Canopy Growth.
In brightly lit, high-tech “grow rooms,” Canopy is preparing for the expected legalization of recreational cannabis this year in Canada—the first industrialized nation to do so at the federal level. Workers in lab coats harvest, trim, and package Canopy’s Tweed-brand products, then store them in a giant vault whose heavy door would do a bank proud.
It is a scene being repeated by companies across Canada, which wants to become the Silicon Valley of recreational pot.
Canada’s experiment is being closely watched by other countries, including the U.S., where federal law still classifies marijuana as an illegal narcotic, but where more than half of the states allow prescription sales and nine have legalized recreational use. The visitor log at Canopy’s Smiths Falls facility shows delegations from dozens of countries.
As they often do, investors have celebrated this emerging business early by embracing Canadian companies that claim a cannabis connection. Traveling in Canada, cabbies, bankers, and even border guards will tell you their favorites in a bubble that has floated Canadian cannabis stocks to a collective stock-market value above $30 billion. That’s already about half the market capitalization of Canada’s gold mining industry.
But a Canada weed glut is a real risk. At current valuations, marijuana stocks are already too high for an investor tempted to join the party.

If other large nations follow Canada’s lead, cannabis could become a consumer discretionary business on the scale of the alcoholic beverage industry, in the view of Constellation Brands (ticker: STZ), the U.S. beer and wine giant that just plunked down $191 million for a 10% stake in Canopy. Constellation recently told analysts that global sales of cannabis products could reach $200 billion in 15 years.
Even under America’s conflicting regulations, Constellation says, U.S. cannabis sales already generate $50 billion annually, versus $60 billion for wine and about $75 billion for tobacco. Canopy’s chief executive, Bruce Linton, is confident that his product can compete against booze. “Mine doesn’t make you fatter or hung over,” he tells Barron’s. “And it leaves you feeling giddy afterwards.”
When Canada’s recreational sales start, Canopy Growth (WEED.Canada) will be ready with an Amazon.com-like e-commerce site called tweedmainstreet.com, featuring company brands like Tweed or Leafs by Snoop (yes, as in Snoop Dogg), as well as small-batch specialties from “craft” growers.

Linton and his rivals expect that nonsmoking forms of cannabis will fast become popular in Canada, as they have in markets such as Colorado. Extracts suited for vaping or munching can deliver the weed’s active ingredients like tetrahydrocannabinol, or THC (the source of a marijuana “high”), and cannabidiol, or CBD (which soothes pain in cancer patients). Food scientists at Canopy’s Smiths Falls plant are spending Constellation’s money to develop edible and potable products, including nonalcoholic, THC-fueled versions of beer, gin, and vodka. These consumable forms of cannabis, however, won’t be allowed until 2019 under Canada’s proposed law.
Along with Canopy, Canada is home to three other leaders in cannabis, all with sprawling greenhouses or high-tech grow houses like those in Smiths Falls. They are Aurora Cannabis (ACB.Canada), Aphria(APH.Canada), and MedReleaf (LEAF.Canada).
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Vivien Azer of Cowen & Co. is the only analyst on Wall Street who covers cannabis stocks. After seeing Colorado’s legal cannabis dispensaries, she put out Buy recommendations for Canopy and MedReleaf. A longtime analyst of the beverage industry, Azer thinks that legalized cannabis could eventually substitute for much of alcohol’s role as “a social lubricant.”
Still, the price of Canada’s marijuana stocks might trigger vertigo. These companies trade for more than 100 times their 2017 sales, and several hundred times that year’s cash flows. Some have market values that are larger than estimated sales for Canada’s entire recreational marijuana market.
If Canada’s retail market can reach $9 billion in annual sales in a few years—as one bull estimates it will—that would yield only a couple of billion dollars in cash flow to wholesale producers like Canopy. So today’s investors are effectively paying 15 times the industry’s cash flow five years from now, a generous multiple. Moreover, there’s reason to believe these revenue forecasts are overly optimistic.
Most predictions fail to consider the dizzying price drops registered in states like Colorado and Washington after they legalized marijuana. In both states, supply gluts have pushed cannabis prices down more than 10% in each of the past two years.
Canada’s leading cannabis companies are “licensed producers” that make most of their money growing marijuana. Canadian investors have given them enough dirt-cheap capital to build more production than the world has ever seen, for a market already well-supplied by illegal growers. Once all the new greenhouses start budding, Canadian weed prices might tumble.
The Canadian companies will have to get through a price shakeout, says Jonathan Rubin, who has tracked U.S. spot prices for several years at New Leaf Data Services, a Stamford, Conn., pricing outfit that hopes to establish the cannabis benchmark. “You’ll hear folks who say that cannabis is different, that it’s not a commodity. Everyone wants to be the Coors of cannabis.”

Those Coors wannabes know that Canada’s recreational cannabis use is among the highest in the world. A 2013 report by Unicef said consumption by Canadian teenagers was the highest for that age group in any developed country. A 2015 report by Toronto’s Center for Addiction and Mental Health said that 45% of Ontario adults had used cannabis at least once, while about 15% acknowledged using it in the past year. And since 2001, Canada has let dispensaries sell marijuana by prescription. In British Columbia, Vancouver has so many dispensaries and lounges that some call it Vansterdam.
Nearly a year ago, the government of Prime Minister Justin Trudeau proposed a bill that would broadly regulate the production and sale of cannabis for recreational use by adults, with a target date of July 1, 2018. While the House of Commons approved the measure, Conservative members of the Senate have slowed its advance; it’s unlikely to become law before September.
The big four weed companies in Canada are gearing up for what they hope will be a large market for recreational use, but they all have gotten their starts as licensed producers of medical marijuana. Their customers get a doctor’s prescription and then register with one of the producers for mail-order delivery.
Neil Closner was an executive at Mount Sinai Hospital in Toronto when investors asked him to go into the medical marijuana business. “I was highly skeptical,” he recalls. But a visit with nursing home patients in Israel left him impressed with the ability of cannabis to relieve suffering from Parkinson’s disease, epilepsy, and cancer. In 2013, Closner helped start MedReleaf and became its chief executive. It now supplies more than 20% of Canada’s prescription cannabis.
In an industrial park near Toronto recently, Closner donned a surgical gown, mask, cap, and slippers to lead a tour of MedReleaf’s flagship plant. Except for the guard in a bulletproof vest, the building is typical of a conventional pharmaceutical operation, with air locks, vent ducts, and sealed doors. Step into a grow room, however, and you’re bathed in yellow light and a certain pungent smell. Green, jagged leaves rise like a forest of miniature Christmas trees, gently swaying under buzzing fans. After 10 weeks under the lights, the plants think it’s summer, and their thick buds turn the room into a two-foot tall jungle.
Licensed producers like MedReleaf are experimenting with cannabis cultivation on a huge scale. A greenhouse-grown crop yields 75 grams of dried flower per square foot, Closner says, but MedReleaf’s high-tech grow house yields 300 grams per square foot. Clean-room precautions keep out mold, mildew, and male pollen. That’s crucial, because every plant in the place is a cloned female and any pollen would make them all go to seed.
At its recent share price of C$17 ($13), MedReleaf’s stock values the company near C$2 billion. It had all of C$11 million in December-quarter sales, with losses of C$5 million, or five cents a share. Until the current fiscal year, MedReleaf had profits and operating cash flow (if you overlook the expense of stock options), but that is changing as it spends to gear up for legalization. The company is buying a million-square-foot greenhouse that will quadruple production.

MedReleaf hopes to establish medical cannabis production in foreign markets, including Germany, where pharmacies prescribe it and health insurers pay for it, unlike in Canada. The international opportunity is why the stock flies so high, CEO Closner says. “The valuation of our industry in the stock market reflects a level of enthusiasm and optimism about the world market,” he says, “which I think is warranted.”
Back in Smiths Falls, Canopy is doubling its output. Already the biggest producer in Canada, it got approval in February to build the world’s largest federally licensed cannabis site, in British Columbia. That will help expand its Canadian growing space to 5.6 million square feet. Over a February weekend, it flew 100,000 live plants to British Columbia in specially built crates.
At a recent stock price of C$33, the market values Canopy at nearly C$7 billion. Its revenue doubled in the December quarter, reaching C$22 million. Some 23% of those sales were cannabis oil and gel caps. Although Canopy showed net income of C$11 million, or one cent a share, the profits resulted from accounting gains. The company actually lost C$26 million on operations for the period and had negative free-cash flow exceeding C$100 million after all its investments for growth. CEO Linton says he wants to ensure that when recreational sales start, his products are on the shelves.
Investors are happy to help. At first, Canada’s biggest banks shunned the cannabis trade, so growers got loans from credit unions and sold stock through small brokers, such as GMP Capital of Toronto and Canaccord Genuity of Vancouver. But recently, the Bank of Montreal’s BMO Capital Markets joined GMP to help Canopy sell a C$200 million stock offering. Like most Canadian cannabis offerings, the shares were easily sold to both retail and institutional investors.
Investors’ money is funding a lot of production. Vancouver’s Aurora Cannabis brags that it grew to Canopy’s size in half the time. Aurora says it is building the world’s largest cannabis greenhouse, next to the airport in Edmonton, Alberta. And a joint venture will erect Europe’s biggest cannabis facility, in Denmark.
Revenue tripled in Aurora’s December quarter, to C$12 million. The company reported net income of C$7 million, or two cents a share, but that was a result of some investment gains. On operations, Aurora lost C$16 million. At a stock price of C$9, the market values the company at C$4.5 billion.
Aurora is sufficiently hungry that it began the industry’s first hostile takeover, in November, for a Saskatchewan producer called CanniMed Therapeutics (CMED.Canada). The board of CanniMed came around in January, after Aurora raised its offer from C$24 a share to C$43 in cash and stock—a total of about C$1 billion, 60 times unprofitable CanniMed’s 2017 sales.
The free-spending ways of other licensed producers is a favorite topic of Vic Neufeld, the chief executive of Aphria. In reporting quarterly sales of C$9 million, Neufeld noted that it had been Aphria’s ninth consecutive quarter with positive cash flow—in this case, C$1 million. The Toronto company says it aims to be a low-cost producer by sticking with greenhouses, instead of the more expensive indoor facilities.
That’s not to say that Aphria has stayed on the sidelines as its rivals spend investors’ money. It recently agreed to buy a company called Nuuvera (NUU.Canada) for about C$500 million in cash and stock. Nuuvera’s total sales over nine months were just C$30,000.
Like Canada’s other cannabis producers, Aphria has a market cap (C$2.4 billion) that seems out of proportion to its historical sales. To guess these companies’ fair value, it makes sense to look ahead to what the industry might look like after recreational sales kick in.
One analyst who has studied that opportunity is Daniel Pearlstein of Eight Capital, a tiny Toronto brokerage firm. He’s a bull, convinced that cannabis presents investors with a once-in-a-lifetime chance to get in on an industry that will boom like the internet.
“This is a market that is simply way bigger than a lot of people believe,” he contends.
How big? About $9 billion a year, Pearlstein estimates. Colorado has a sixth of Canada’s population, he notes, and the state’s cannabis sales reached $1.5 billion in its fourth year of legalization. So Pearlstein multiplies Colorado sales by six. And, of course, there are countries with potential markets bigger than Canada’s. Pearlstein believes that federal legalization gives the U.S.’s northern neighbor a head start to becoming the world’s preferred supplier.
Cowen analyst Azer is as optimistic as Pearlstein, although she worries about pricing, as legal weed finds a balance between supply and demand.
She’s right to worry.
Rubin’s New Leaf Data Services has a Cannabis Benchmarks index, which tracks weekly spot prices in more than a dozen markets, including Colorado, Washington state, and California. The volume-weighted index found that in states where weed is legal, spot prices dropped 20% over the course of 2016. The average in 2017 was 13% below 2016’s.
Prices were stable in the first year or so of legalization in Colorado and Washington, while supply caught up with demand. But then, cannabis behaved like other crop commodities; prices dropped in a supply glut. Canada’s market should also be well-supplied. There were four licensed producers when Health Canada began handing out licenses. Today, there are 94.
The potential for a supply glut is underscored by the claims of many producers that they are each building the world’s biggest grow house.

Neil Closner, MedReleaf’s chief executive, touring his company’s growing facility in Markham, Ontario. “The valuation of our industry in the stock market reflects a level of enthusiasm and optimism about the world market,” he says, “which I think is warranted.” PHOTO:NATHAN DENETTE/THE CANADIAN PRESS VIA AP

In February, Cronos Group (CRON) became the first Canadian grower to list shares on a U.S. exchange. At a recent $6.73, the Nasdaq-traded stock values the company at $1.1 billion, even though it had only C$3 million of sales in the 12 months ended September. That may explain why Cronos’ latest investor presentation shows no financial results--though it does say that it is building a 286,000-square-foot grow house that is “expected to be the largest purpose-built indoor cannabis production facility in the world.”
All these giant greenhouses won’t just compete with one another, of course. By some estimates, North America’s black market for marijuana is worth more than $50 billion a year. A study done for California by ERA Economics concluded that, in 2016, the state’s cannabis suppliers sold $1 billion worth to legal users and over $20 billion to illegal customers—mostly out of state.
One of Prime Minister Trudeau’s main legalization aims is to take sales from Canada’s estimated C$7 billion black market (and generate tax revenue in doing so). But that will take years, because black market incumbents won’t give up without fighting back by discounting their prices below those of the legal stuff.
Walk around certain neighborhoods of Vancouver or Toronto, and it’s hard to avoid passing a cannabis dispensary. Some require a prescription; some don’t. Strictly speaking, they’re all illegal. Websites also make it easy to arrange home delivery, and pop-up street fairs are common and hard to police, however illegal.
On an East Toronto street recently, the milling crowd made it obvious which door to try. Every minute or so, the dispensary’s manager buzzed in another group of young adults. A scruffy counter in the back of the undecorated space held the goods. The household furniture completed the low-rent look.
The shop’s manager, a cancer survivor, was furious that Ontario’s legalization plans leave out the pioneers of the cannabis trade. The manager, who asked not to be named because of past litigation, predicts that the black market will fight back by pricing its products at C$6 a gram, while the legal stores charge C$10.
Canada’s legal producers will have another pricing headache: The most populous provinces will allow retail sales only through government stores operated by provincial control boards. So in Ontario and Quebec, licensed producers will have just one large customer, which will dictate what they are paid.
Neufeld, the Aphria CEO, has warned that prices paid by these government stores will disappoint the industry’s high-cost growers. Talking on his last earnings call about his new contract with Quebec, he argued that “what they’re willing to pay licensed producers is absolutely going to force compression in pricing and therefore margins.”
From his study of the legal cannabis markets in Colorado and Washington, Rubin of New Leaf Data Services expects Canada’s recreational users to be uninterested in paying up for premium brands. He says the two questions he mainly hears in those states’ stores are: “What’s most potent?” and “What’s on special?”
Neufeld, in talking up Aphria’s focus on costs, scoffs at the exuberance he sees in his industry. Some licensed producers, he says, “are stating that it will be impossible not to make money once the recreational markets open up.”
But, he adds, “L.P.s that haven’t made profits while scaling up will continue to burn cash and ultimately disappoint investors.”

WSJ : Walmart in Early-Stage Acquisition Talks With Humana

Walmart in Early-Stage Acquisition Talks With Humana
If companies do strike deal, it would be retail giant’s largest by far
Walmart Inc. WMT 1.37% is in preliminary talks to buy insurer Humana Inc., according to people familiar with the matter, a deal that would mark a dramatic shift for the retail behemoth and the latest in a recent flurry of big deals in health-care services.

It isn’t clear what terms the companies may be discussing, and there is no guarantee they will strike a deal. If they do, the deal would be big: Humana currently has a market value of about $37 billion.

It also would be Walmart’s largest deal by far, eclipsing its 1999 acquisition of the U.K.’s Asda Group PLC for $10.8 billion. Walmart, which in addition to being the world’s biggest retailer is also a major drugstore operator, has a market value of about $260 billion.

The two companies are discussing a range of options, including an acquisition, one of the people familiar said. Shares of Humana surged 10% to $297 in after-hours trading after The Wall Street Journal first reported the talks. Walmart shares slipped 1% to $88.10 in late action.


Should there be a deal—and should regulators and shareholders bless it—it would transform Walmart overnight into one of the nation’s largest health insurers. It would immerse the company in a complicated industry, one that continues to evolve eight years after the Affordable Care Act was enacted and as Washington remains deeply divided over health-care policy.

The talks come as health-service providers are rapidly pairing off and retailers—particularly pharmacy chains—are looking to diversify and bulk up in the face of the competitive threat from e-commerce giant Amazon.com Inc.

In December, CVS Health Corp. agreed to buy Humana rival Aetna Inc. in a $69 billion deal aimed at allowing the drugstore-chain to capture more of what consumers spend on health care. In March, health insurer Cigna Corp. agreed to buy Express Scripts Holding Co. , the biggest administrator of prescription-drug benefits in the U.S., for $54 billion.

Walmart has a vast pharmacy business, with locations in most of its roughly 4,700 U.S. stores and in many of its Sam’s Club warehouse locations. Humana is a Medicare-focused insurer that could deepen Walmart’s relationship with a key demographic—seniors—at a time when the retailer is being threatened by Amazon on several fronts.

For Walmart, a deal would hand it a new role in health care, as well as a rich trove of data. In addition to its pharmacies, Walmart already has some primary-care clinics and recently said it would work with a major laboratory company to begin offering lab-testing services in some stores.

In announcing that partnership last June, a Walmart executive said the company was “not only focused on providing accessible, affordable health care, but also working to extend our offerings—truly making our stores a one-stop shop for our customers’ everyday health and wellness needs.”

The Bentonville, Ark., retailer is the country’s largest private employer, with about 1.5 million U.S. workers, and a deal with Humana could allow the retailer to save on its own insurance plan.

Humana, which had $53.8 billion in revenue last year, is the second-biggest provider of the private Medicare plans known as Medicare Advantage. Humana has about 17% of the Medicare Advantage market, according to a tally by analysts at Wells Fargo, with about 3.5 million participants. Medicare is viewed as a growth engine in the insurance industry, as the baby boomers age into the program.

Humana also owns its own pharmacy-benefit manager, which itself had revenue of about $21 billion last year, and Walmart and Humana already partner on Medicare drug plans. Humana has about 4.9 million people enrolled in its Medicare drug plans, known as Part D plans, and is the third-biggest provider of them, according to Wells Fargo.

Humana has been expanding into the business of providing health care, working closely with doctors. The insurer has said it aims to get deeper into managing the care of its members, as a means of curbing costs and meeting quality goals. Last year, the company said it would take a stake in a big home-health and hospice-care provider.

Meantime, Amazon has loomed ever larger in the health-care industry, especially after its January announcement that it would partner with Berkshire Hathaway Inc. and JPMorgan Chase & Co. on a venture to reduce their employees’ health-care costs. Amazon has been eyeing an entry into the pharmacy-services industry, and it recently expanded its discounted Prime program to beneficiaries of Medicaid, the government health-coverage program for lower-income people, a key demographic for Walmart.

A Walmart-Humana deal would cap a rapid-fire series of transactions that could transform the business of managing health care. Many of the biggest health insurers are pairing up with others outside their industry to create behemoths with a far larger role in the health-care sector after two attempted health-insurance mergers were blocked in early 2017 by courts on antitrust grounds: Aetna-Humana and Anthem Inc. -Cigna.

>>> US Early premarket gappers

Early premarket gappers

Gapping up:

  • SENS +24.3%, HUM +7.9%, TEO +2%, MUX +1.9%, BHGE +1.8%, SMI +1.2%, ABX +1.2%, MDR +1.1%

Gapping down:

  • IBN -7.7%, TRXC -5.3%, TSLA -3.4%, ACSF -3.1%, SORL -2%, PRGO -1.1%, GM -0.9%


>>> Takeda’s ability to fund Shire acquisition questioned as Moody’s warns of mo

Takeda’s ability to fund Shire acquisition questioned as Moody’s warns of more debt
02 APR 2018
Takeda Pharmaceutical [TYO:4502] is unlikely to be able to acquire Shire [LON:SHP] without taking on new debt, Moody’s ratings agency cautioned in an update on 30 March. The warning has fuelled questions about the Japanese company’s ability to fund a Shire takeover without overstretching its finances, The Daily Telegraph reported.
The companies’ “global complexity” and the transaction’s size may make a deal hard to execute, Moody’s said. Ireland-headquartered Shire’s credit rating with the agency is the lowest possible investment grade rating, the Telegraphnoted.
Takeda confirmed last week it was considering a takeover bid for Shire. The UK Takeover Panel has set a 25 April deadline by which Takeda must launch a formal offer if it is to proceed, the report noted.