Should Lexaria have given Altria all the rights to their technology?

QUESTION: I love Lexaria (OTCQX: LXTRP) and Khiron Life (TSXV: KHRN). I own them both because of your recommendation. My question relates to the Altria/Lexaria deal. It appears Lexaria gave Altria (NYSE: MO) all the rights to their technology in the U.S. I don’t like sleeping with the first suitor. What do you think?

B.C. in the United States

ANSWER: Management has told me Altria was not the only large tobacco company Lexaria had one or more conversations with. So I don’t think it’s accurate to say MO was the first suitor by any stretch.

Sometimes it is important to take one step back and give your head a shake. MO is the world’s largest tobacco company and has sales of almost $70 million a day. MO has a market cap (value of all MO shares outstanding multiplied by the stock price on the New York Stock Exchange) is 830 times larger than Lexaria’s market cap. So the ability of LXRP to negotiate and finalize a transaction with MO is a major accomplishment in itself, in my opinion. I have been analysing small and microcap companies for many years and for a very small company like Lexaria is able to do a deal with a very large company like Altria is a very rare event.

At the same time, many readers wonder why Lexaria’s stock has traced back much of its gains since originally running up on the day of the announcement. I suspect the early buyers thought there was going to be an investment in LXRP just as Altria did with Cronos. But to me, looking at it from Lexaria’s and their shareholders perspective, this is an attractive a deal. Under the terms of a Cronos-type deal, Altria would have to end up owning over 90% of Lexaria. LXRP shareholders would probably be diluted by over 90% on everything. I suspect the original buyers of LXRP thought there was a big cash investment being made by MO into LXRP. When that didn’t happen they were disappointed and began to sell. What is likely to happen next is people will figure out what an advantageous deal this is for LXRP. First, it is non-dilutive for LXRP shareholders. Even if Altria ends up taking over Lexaria Nicotine for (enter your number here) hundred million dollars, there is no dilution for shareholders. Not only that Lexaria retains total ownership of the technology for use with cannabis, vitamins and non-steroidal anti-inflammatory drugs and whatever additional applications are discovered. When investors understand the high degree of credibility Altria gives Lexaria, these other applications are likely to move ahead more rapidly.

I can only guess that we are still in a jittery stock market as far as cannabis stocks are concerned. It’s a time when people look to see what is wrong with a deal instead of what is right with it. Sometimes the market does things that are inexplicable. What this means if you’re an investor is the market is giving you a second chance.

Finally, when a news event moves a stock up sharply, it is normal for it to retrace between 25% and 30% of the gain before carry on to higher levels. As the chart of LXX trading on the Canadian Stock Exchange shows, LXX had made a tax loss selling closing low of $1.09 per share before spiking sharply to a short term peak of $2.11 per share on the Altria news. This was a gain of 94%. Since then it retraced to a closing low of $1.69 or roughly 20%. I think it will trade higher moving forward but what has happened to date is not exceptional.

Has anything ever happened in your life when you have said to yourself in a private moment: “Boy I wish I had done that?” If “that” was buying Lexaria, guess what? Life is giving you another chance.