Until U.S. Legalizes Pot Federally, Look For Small, Strategic Deals In Sector

With today being Apr. 20, or, as the marijuana industry likes to refer it, 4/20, the annual celebration of all things pot-related, added attention will be focused on the cannabis sector.

The overall thrust in the industry continues to be concentrated on US federal legalization, with US Senate Majority Leader Chuck Schumer as yet to announce a detailed timeline on a promised bill. The best he has offered in recent weeks is to simply say a Democratic bill would be presented “soon.”

So let’s bypass the macro issues and dig down into a one of the latest micro deals that has made a few headlines. Because it could very well be the latest evidence of another emerging trend within the sector.

Earlier this month Canopy Growth (NASDAQ:CGC) (TSX:WEED) announced the pending acquisition of Supreme Cannabis (OTC:SPRWF) (TSX:FIRE). The takeover is a $435-million cash-and-stock deal.

Canopy Daily

Canopy, once the world’s largest marijuana grower, targeted the rival Canadian-based company to bolster its lineup of recreational, wholesale and medical offerings. The aim in this deal, it appears, has more to do with quality than quantity, as Canopy was looking to improve its premium brand offerings.

Traded both on the Toronto Stock Exchange and the US OTC Markets, Supreme is a relatively small company that has seen its stock price gain almost 50% in the past 12 months.

The Supreme acquisition, however, is the latest move that indicates support for what many in the sector are seeing as a trend—increased consolidation. One of the engines that could be propelling this trend is the the glut of cannabis on the market. It’s a dilemma that growers continue to grapple with that is keeping a downward pressure on prices. But investors could see more smaller companies with solid performance records being scooped up by the larger players.

So far this year, the sector has seen a few deals that point to the consolidation trend. The first signal came with the announcement of the Aphria (NASDAQ:APHA) (TSX:APHA)/Tilray (NASDAQ:TLRY) merger, which Aphria stockholders overwhelmingly approved earlier this month. The vote by Tilray shareholders has been extended until Apr. 30, but is expected to meet its threshold for approval.

In February, another deal saw Hexo (NYSE:HEXO) (TSX:HEXO) buy Zenabis Global (OTC:ZBISF) (TSX:ZENA) in a $235-million deal.

Unlike the blockbuster mega deals of the early expansion of the cannabis sector, these relatively smaller buyouts provide specific synergies. They are seen as strategic moves to shore up brands, market access or retail networks.

As Canopy CEO David Klein reportedly said in media interviews shortly after the announcement of the Supreme Cannabis purchase, the company is looking for strategic acquisitions and expects to see more consolidation, especially among Canadian-based companies. But the big moves of capital investment will be reserved for expansion into the US when the green light is finally given.