Canopy Growth Corp. said Thursday it has reached an agreement to acquire Toronto-based Supreme Cannabis Co. Inc. in the latest M&A deal in a cannabis sector that is seeing a burst of activity amid hopes for reforms of strict U.S. laws.
Canopy CGC, -4.54% WEED, -4.53% said the stock-and-cash deal is valued at about C$435 million ($345.6 million). Supreme Cannabis SPRWF, +52.52% FIRE, +49.06% shareholders will receive 0.01165872 of Canopy stock for each share owned, plus C$0.0001 in cash. That is equal to a premium of about 66% for Supreme Cannabis shareholders based on the closing prices of both stocks on the Toronto Stock Exchange on Wednesday.
Supreme shares rocketed more than 50% on the news.
The deal gives Canopy access to premium Canadian brand 7Acres, along with consumer insights and R&D capabilities. The combined pro forma market share is estimated to be 23.3% of the premium flower segment in Ontario and 21.4% in British Columbia, the companies said in a joint statement.
Canopy expects the deal to generate synergies of about C$30 million within two years. The deal is expected to close by the end of June.
It comes a week after Canopy, the biggest Canadian cannabis company measured by market capitalization thanks to a $4 billion investment by Corona beer distributor Constellation Brands Inc. STZ, -3.92%, closed its acquisition of AV Cannabis Inc., an Ontario brand with a focus on ready-to-enjoy products — vapes, pre-rolls and gummies. AV’s products are popular with the millennial and Gen-Z generations.
Rahul Sarugaser, analyst at Raymond James, said the move is positive as Canadian companies rapidly move to develop brands that will resonate with consumers.
“ “There really isn’t a single dominant brand and so companies are growing so as to compete on a multistate and international level. Companies are acquiring other companies to grow in other states and to fill in the missing pieces to be vertically integrated – which is better for tax purposes.” ”
“The premium and super-premium cannabis segment is among the fastest-growing in the Canadian cannabis market, and is clearly being valued at a premium—66%, in this case—by the largest players in the sector,” Sarugaser wrote in a note to clients.
The big licensed producers are waking up to the power of having brands with loyal followers, and Canopy’s two latest deals illustrate that trend, he wrote.
“Consolidation and branding are the name of the game in the industry’s race to be the top cannabis company,” agreed Nick Richards, partner in Greenspoon Marder’s Cannabis and Tax practices. “There really isn’t a single dominant brand and so companies are growing to compete on a multistate and international level. Companies are acquiring other companies to grow in other states and to fill in the missing pieces to be vertically integrated – which is better for tax purposes.”
Sarugaser noted that the merger of Aphria Inc. APHA, -0.01% APHA, +0.05% and Tilray Inc. TLRY, -0.48% is expected to close April 14.
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Raymond James does not cover Canopy or Supreme, but said Rubicon Organics Inc. ROMJ, +8.77% ROMJF, +9.76% is its top pick in the premium/super premium segment, has assigned it a strong buy rating and deems it is “very best micro-cap idea.”
At Jefferies, analyst Owen Bennett also welcomed news of the deal but described it as “hardly transformational in terms of impact.”
The positives include that there is no dilution, given Canopy’s multiple relative to Supreme, he said.
“Two, it addresses big weaknesses in Canopy’s portfolio in Canada. Three, likely cost saves means it is better placed to hit its 2H22 EBITDA positive target than it was before,” said Bennett, who rates Canopy as underperform.
Canopy cheered investors in February when it reported fiscal third-quarter earnings and said it expected to achieve positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in the second half.
Other recent tie-ups in the cannabis sector include Organigram Holdings Inc.’s OGI, +0.16% acquisition of The Edibles & Infusions Corp. on Tuesday for C$22 million in stock, plus up to an additional C$13 million in shares. It was the company’s first deal since receiving a C$221 million ($176 million) investment from British American Tobacco PLC. BTI, +2.94% BATS, +3.01%
In February, Hexo Corp. HEXO, +3.07% HEXO, +3.08% said it was acquiring Zenabis Global Inc. ZENA, +9.09% ZBISF, +2.70% in an all-stock deal valued at about C$235 million.
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Also in February, GW Pharmaceuticals Ltd. GWPH, +0.22%, developer of Epidiolex, the drug that won U.S. Food and Drug Administration approval as a treatment for severe forms of childhood epilepsy in 2018, announced it was being acquired by Jazz Pharmaceuticals PLC JAZZ, -0.42%, which specializes in sleep medications, in a $7 billion deal.
The cannabis sector has been in rallying mode for much of 2021 amid hopes for cannabis reforms under the administration of President Joe Biden, and as more U.S. states legalize for adult recreational use, including New York, long viewed as a key market.
Canopy is expected to be a big gainer in a U.S. legal market as it has an option to acquire a multistate operator that will be triggered upon a change on the U.S. law.
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The latest deal sent cannabis stocks higher Thursday, with the Cannabis ETF THCX, +2.14% up 3%.
Canopy was down 3.6%, but remains up 17% in the year to date, outperforming the S&P 500 SPX, +0.32% which has gained 9%.
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