March 14, 2019

Breakingviews: Peltz is triple threat of cannabis endorsements

by Breakingviews.

Aurora Cannabis has opted for the activist approach to going mainstream. The Canadian pot producer has given investor Nelson Peltz a role as a strategic adviser, and options to take roughly a 2 percent stake in the company. Other investors are already riding in on the coattails of the man who shook up sleepy giant Procter & Gamble. Yet such arrangements are risky for regular investors, who can’t match the VIP terms on offer to high-profile patrons.

Peltz is something of a triple threat for the C$12 billion Aurora. He brings expertise and contacts, via his years at consumer companies like Mondelez, and his seats on the board at P&G and fast-food chain Wendy’s. And his presence may make financial institutions a fraction more comfortable. Companies like Goldman Sachs aren’t yet advising cannabis companies directly, but are regularly schmoozing their executives.

While Peltz’s expertise is more junk food than weed, that’s probably the point. Producers of cannabis have invested millions into growing a plant poised to become highly commoditized – it’s basically possible to grow it anywhere. So they are instead hoping to become branding experts. That is sensible. In U.S. states where cannabis has been legalized, prices of the crop have collapsed. Aurora, which has plans to triple its production of cannabis from its run rate at the end of 2018, is exposed to that kind of risk.

The catch is that celebrities don’t come for free. Peltz’s options give him exposure without a cash outlay, and by Wednesday mid-morning were already in the money. Peltz may be shouldering some risk to his name by investing in the sector, but there’s no financial downside. Consider, too, Oprah Winfrey at Weight Watchers, or Warren Buffett at Kraft Heinz. Both recently lost value on their sizable stakes as the companies’ shares fell – yet both had bought in on terms others didn’t, helping keep their investments afloat.

It goes without saying that a celebrity endorsement alone doesn’t make a company a success. Less often noted is that when a company fails to thrive, investors with VIP terms often feel less pain than their mortal brethren.

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