Following Tilray’s (TLRY) merger with Aphria (APHA), we expect to see additional consolidation in the Canadian cannabis industry.
For several years, we have been closely following the Canadian cannabis sector and have been expecting to see a significant merger and acquisition (M&A) trend. A few months after Tilray announced the planned merger with Aphria Inc., Canopy Growth Corporation (WEED.TO) (CGC) reported to have entered into a definitive agreement to acquire The Supreme Cannabis Company (FIRE.TO) (SPRWF).
The combination of Tilray and Aphria should create the world’s largest cannabis company and we believe that Canopy Growth is trying to acquire strategic cannabis assets to regain its leadership standing.
Today, we have highlighted 5 companies that we consider to be potential acquisition targets and have provided our rationale behind it.
- HEXO Corporation (HEXO.TO) (HEXO) has been nothing short of a turnaround story and attributes the recent success to its relationship with Molson Coors Company (TAP). While we do not expect Molson to acquire HEXO, we expect the leverage to the cannabis beverage market in the US and Canada to be attractive to potential acquirers. As it relates to the potential for HEXO, we expect to see a deal that is similar to Aphria-Tilray and would not be surprised if the business merged with a company of a similar size.
- Cronos Group Inc. (CRON.TO) (CRON) was one of the first Canadian cannabis companies to receive a more than $2 billion (CAD) investment. Leading tobacco company Altria Inc. (MO) made the investment in Cronos and owns 45% of it. According to the agreement, Altria can purchase up to 55% of the Canadian Licensed Producer (LP) and we would not be surprised if the tobacco conglomerate acquired the rest of the business. Cronos has attractive leverage to strategic international markets and we consider this to be attractive to potential acquirers.
- Earlier in the article, we highlighted Canopy Growth’s previously announced agreement to acquire The Supreme Cannabis Company. Although we expect to see Canopy Growth make additional acquisitions, we would not be surprised if the global cannabis company was acquired by Constellation Brands (STZ). So far, Constellation has invested more than $4 billion in Canopy Growth and this investment proved to be a catalyst for the entire cannabis industry. Last year, Constellation Brands announced that it would be exercising warrants which would give it a 38.6% ownership stake in the cannabis company.
- Aurora Cannabis Inc. (ACB.TO) (ACB) has not lived up to our expectations and we continue to cautiously monitor the business. Last year, the Canadian LP acquired a US CBD brand and changed up the executive team after the deal was completed. Aurora Cannabis is well known for acquiring two LPs for more than $7 billion (CAD) in stock. The company recently conducted a large reverse split to lower the number of shares outstanding and to remain listed on the New York Stock Exchange (NYSE).
- Only a few weeks after receiving a $175 million dollar investment from British American Tobacco (Nasdaq: BTI), Organigram Holdings Inc. (TSX: OGI) (NASDAQ: OGI) announced a major change to the leadership team. The Board of Directors announced that CEO Greg Engel is stepping down from his role as CEO and this development came as a surprise. Engel did a fantastic job at turning around the business after Organigram recalled cannabis products due to the presence of prohibited chemicals in 2016. We believe the relationship with BTI could advance and would not be surprised to see the tobacco company acquire the rest of it.
If you are interested in learning more about Canadian LPs that represent potential acquisition targets, please send an email to firstname.lastname@example.org with the subject “Canadian M&A” to be added to our distribution list.
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