The CEO of Canopy Growth lays out 3 reasons his acquisition spree will help the world's largest cannabis company dominate the lucrative US marketApril 8, 2021
- Canopy Growth is buying Supreme Cannabis in a $346 million mostly stock deal.
- Canopy’s CEO said the deal targets the premium end of the market and lays groundwork for US expansion.
- Analysts called the deal a positive for Canopy but not “transformational.”
- See more stories on Insider’s business page.
Canadian cannabis giant Canopy Growth has been on an acquisition spree in recent weeks, snapping up smaller companies in a bid to boost profitability at home and lay the groundwork for US expansion.
Canopy, the world’s largest cannabis company by market cap, said on Thursday morning it would pay approximately C$435 million ($346 million) in a mostly stock deal, including debt, to acquire The Supreme Cannabis Company, which sells the 7Acres line of cannabis products in Canada. The company closed its acquisition of AV Cannabis, a Toronto-based company that produces the Ace Valley line of cannabis products, earlier this month.
Canopy CEO David Klein said in an interview that the deal is all about prepping for the US market and expanding into the “premium” end of the cannabis consumer segment — an area where Supreme shines.
“We think that as we transition to a consumer and brand-focused company, that this set of brands is a nice fit for our portfolio,” Klein said.
How the deals fit into Canopy’s US ambitions
Klein has US ambitions, like the rest of the cannabis industry.
Numerous states, including New York, have legalized cannabis for adults over the age of 21 since November. And the Democratic-led Congress is working on a number of bills that would help cannabis companies lower costs and expand their businesses.
Klein said Canopy’s recent acquisitions help Canopy’s long-planned expansion into the US in three key ways.
First, it’ll help the company achieve profitability in Canada, a goal Klein outlined on a recent call with investors. Second, with the Ace Valley And Supreme brands, Canopy will have more data on what North American cannabis consumers want and will be able to target new product offerings to what customers are buying before pushing into new markets.
And last, Klein said the brands are strong enough “in their own right” to bring into the US once it’s federally permissible to do so.
Cannabis is still federally illegal in the US and it’s not yet clear whether any of the cannabis bills Congress is working on will let Canadian companies enter the country. Klein said he’s hearing from Canopy’s lobbyists in Washington, D.C. that “federal permissibility is coming like a freight train.”
“More than 70% of the US population now live in a state that has some form of legal cannabis use,” Klein said. “And I think that’s just creating a lot of pressure for the federal government.”
Canopy has a deal to acquire a majority stake in New York cannabis company Acreage Holdings as soon as it is legally able. Already, Canopy licenses its brands like Tweed and its CBD gummy collaboration with Martha Stewart to Acreage in the US.
Canopy’s deal follows a whirlwind few months of M&A in the cannabis industry. Two of its largest competitors, Tilray and Aphria, agreed to merge in a $4 billion deal in December. And in February, Canadian cannabis company Hexo Corp. agreed to acquire Zenabis in a $187 million cash and stock deal.
Canopy’s US counterparts like Curaleaf and Trulieve have been expanding their presence in global markets and in the US.
Analysts say there’s ‘not much’ of the deal to be critical of
An analyst at Jefferies said the Supreme deal is “pretty much free” for Canopy shareholders and addresses “weaknesses” in Canopy’s product portfolio.
The Supreme deal adds “a strong premium brand to its offerings,” Jefferies analysts Owen Bennett and Thea Wang wrote in a Thursday morning note. “Premium brands come with greater brand loyalty and pricing power over the longer term.”
Still, the analysts wrote that there’s “not much of the deal to be critical of really apart from the fact it is hardly transformational in terms of impact.” They maintained their underperform rating on the stock.
The deal terms represent a 66% premium on Supreme shares
Canopy’s deal will see Supreme Cannabis shareholders receive 0.01165872 of a Canopy common share and C$0.0001 in cash in exchange for each share. The terms represent a 66% premium on the April 7 closing price of Supreme’s TSX-listed shares.
Canopy said in a statement that once the deal closes, the combined company will own a 13.6% share of the Canadian cannabis market. The companies estimate the deal will result in about C$30 million in cost savings within the next two years.
Supreme shares skyrocketed over 54% on the news as of midday Thursday. Nasdaq-listed shares of Canopy sank 4.5%.
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