Why Valens Traded Lower After SNDL Reports an Agreement to Acquire it for a Premium

As global economies remain in a volatile state, we are seeing an increasing amount of consolidation in the cannabis sector. Although the trend slowed down after valuations peaked a few years ago, we expect the trend to change over the next year.

The agreement between SNDL Inc. (Nasdaq: SNDL) and The Valens Company Inc. (TSX: VLNS) (Nasdaq: VLNS) is the perfect example of synergistic transactions that we expect to accelerate within the cannabis sector. Based on the pricing of the transaction, Valens is trading for a discount and we were surprised to see the stock trade lower on the announcement.

The transaction combines a Canadian Licensed Producer (LP) with leverage to several international markets with a Canadian cannabis processing service provider which has a proven track record of product development, manufacturing, and commercializing consumer packaged goods. We expect the agreement to create a larger-scale vertically integrated cannabis platform.

Although we remain cautious with the Canadian cannabis sector, we believe the combined company is better positioned to survive a further downturn in the markets. If the transaction is completed, the combined company will have a stronger balance sheet and we will monitor how the management team is able to identify areas to find synergies.

During the last year, both Sundial and Valens have been under considerable pressure with the rest of the Canadian cannabis sector. Both companies have been relatively busy on the M&A front and we will monitor how the transaction impacts gross margins and net profit in the near and the long-term.

Over the next year, we expect to see similar transactions and believe there are several operators that stand out as acquisition targets. We would not be surprised to see additional consolidation before the end of the calendar year and believe this could benefit the sector.

If you are interested in learning about Canadian cannabis companies which we believe could be acquired, please send an email to support@technical420.com with the subject “Canadian Cannabis Acquisition Candidates” to be added to our distribution list.

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Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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