Canopy Growth to acquire Supreme Cannabis in latest tie-up in busy weed sector

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 reform of strict U.S. laws.


said the stock-and-cash deal is valued at about C$435 million ($345.6 million). Supreme Cannabis

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.
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 generation and Gen-Z.

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Rahul Sarugaser, an 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.’

— Nick Richards, Greenspoon Marder

“The premium and superpremium 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 Raymond James 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.

Individual investors on Reddit’s popular WallStreetBets forum have been talking up marijuana stocks, sending shares of some U.S.-listed cannabis companies on a roller-coaster ride.

“Consolidation and branding are the name of the game in [a] race to be the top cannabis company,” agreed Nick Richards, a partner in the national law firm 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.”

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Sarugaser noted that the merger of Aphria Inc.

and Tilray Inc.
is expected to close April 14.

See now: To profit from planned merger of Tilray and Aphria, buy Aphria, says this analyst

Raymond James does not cover Canopy or Supreme but said Rubicon Organics Inc.

is its top pick in the premium/superpremium segment, has assigned it a strong buy rating and deems it its “very best microcap 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 [savings] means it is better placed to hit its [second half of 2022] EBITDA-positive target than it was before,” said Bennett, who rates Canopy underperform.

Canopy cheered investors in February when it reported third-fiscal-quarter earnings and said it expected to achieve positive adjusted earnings before interest, taxes, depreciation and amortization in the second half.

Other recent tie-ups in the cannabis sector include Organigram Holdings Inc.’s
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

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In February, Hexo Corp.

said it was acquiring Zenabis Global Inc.

in an all-stock deal valued at about C$235 million.

Read now: To profit from planned merger of Tilray and Aphria, buy Aphria, says this analyst

Also in February, GW Pharmaceuticals Ltd.
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
which specializes in sleep medications, in a $7 billion deal.

The cannabis sector has been in rally mode for much of 2021 amid hopes for cannabis reforms under the administration of President Joe Biden and as more U.S. states legalize cannabis 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.

Read now: U.S., not Canada, should be driver of value in Canopy Growth shares, analyst says

The latest deal sent cannabis stocks higher Thursday, with the Cannabis ETF
up 3%.

Canopy was down 3.6% but remains up 17% in the year to date, outperforming the S&P 500
which has gained 9%.

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