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Which Canadian LP Will Be The Next Up To Make A Transformative Acquisition?

Aug 24, 2021 • 7:41 AM EDT
4 MIN READ  •  By Michael Berger
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During the last year, the cannabis sector has recorded impressive growth as countries continue to pass cannabis legislation and we are bullish on the trend. 

From the European Union (EU) to Latin America, burgeoning cannabis markets are popping up all over the world. Companies have been highly focused on this trend and Canadian Licensed Producers (LPs) have been the primary beneficiaries of it. 

So far this year, we have seen a substantial increase in the amount of merger and acquisition (M&A) transactions in Canada. Over the next year, we expect this trend to continue and possibly become more significant. 

The increase in M&A activity in the Canadian cannabis sector has raised questions about LPs that are positioned to survive this trend and we want to highlight 3 operators that could be impacted by it. 

Canopy Growth: Is it Still an Industry Leader

When compared to prior years, Canopy Growth Corporation (TSX: WEED) (Nasdaq: CGC) has been quiet on the M&A front so far this year. In previous years, the leading Canadian LP has completed several major acquisitions and have reported some of the most significant transactions in the history of the entire industry. 

A few years ago, Canopy Growth announced a change at the helm of the company and replaced Bruce Linton with Derek Klein as Chief Executive Officer (CEO). Previously, Klein served as Chief Financial Officer (CFO) and as a member of the Executive Management Committee at Constellation Brands (Nasdaq: STZ). 

While serving as CFO at Constellation, Klein played a key role in the company’s decision to make an investment in Canopy Growth in 2017 and has served on Canopy’s Board of Directors since November 2018. When his appointment as CEO was announced, we were not too surprised by the development due to his track record at Constellation. 

Under Klein’s leadership, Canopy Growth divested and wrote off more than $1 billion of assets that were previously acquired. He has put a major emphasis on improving operational efficiency at Canopy Growth and we will monitor how the story evolves from here. Going forward, we would not be surprised to see the company make strategic bolt-on acquisitions that will prove to be immediately accretive and continue to closely follow the opportunity. 

Aurora Cannabis: Can the Business get Back on Track

Aurora Cannabis Inc. (TSX: ACB) (Nasdaq: ACB) is another Canadian LP that we have been highly focused on. Like Canopy Growth, the company has been much less active on the M&A front and this is a trend we are closely following. 

When compared to Canopy Growth, Aurora Cannabis is less advanced and has less room for error. The two Canadian cannabis companies are similar in the way the management team has changed. We are of the opinion that Aurora Cannabis is under more pressure than Canopy Growth and have less confidence in the management team. 

In 2020, Aurora Cannabis completed the acquisition of Reliva, which is sells hemp-derived cannabidiol (CBD) products in the US. Following the completion of the transaction, several members of Reliva’s management team replaced executives at Aurora Cannabis and we believe the changes have slowed down the growth of the business. 

The market has been less than pleased with the changes at Aurora Cannabis and the stock has fallen more than 50% from its 2021 highs. Due to the changes to the business, we are cautious with the opportunity and will monitor how the new management team is able to get the company back on track. 

Aleafia Health: An Acquisition Target?

Earlier this month, Aleafia Health Inc. (TSX: AH) (OTC: ALEAF) reported second quarter financial results that showed impressive growth when compared to the same period last year. The company has benefited from the legalization of cannabis 2.0 products in Canada as well as from international markets like Australia and Germany.

Earlier this week, the Canadian LP reported to have closed a $10 million senior secured term (non-revolving) credit facility. The credit facility was immediately drawn down and the net proceeds are expected to be used to support accretive growth initiatives. These types of initiatives include: 

  1. Improved product availability in the adult-use business
  2. Accelerating onboarding of new employer relationships under the exclusive Unifor agreement
  3. Operational efficiency enhancements on the production lines at its manufacturing facility in Ontario
  4. General corporate purposes.

Although Aleafia Health has reported several important developments so far this year, the trend has been to the downside and we find the risk-reward profile to be favorable at current levels. Over the next year, we would not be surprised to see the busines acquired by a large-scale Canadian LP and believe that it owns strategic cannabis assets. 

If you are interested in learning more about Canadian LPs, please send an email to support@technical420.com with the subject “Canadian LPs” to be added to our distribution list. 

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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