A Defining Year for Marijuana Stocks
When financial historians look back on 2018, they’ll remember it as a period ripe with marijuana stock takeover targets. Barely a week passes without a major buyout, which makes my job as a financial analyst very clear: find the next best marijuana takeover targets.
Luckily, I’ve seen this movie before.
Microchip makers went through the same cycle a few years ago. Like kids picking teams in the schoolyard, companies stacked their sides with the best players. There were hundreds of mergers and acquisitions (M&As).
Here are three of the most memorable ones:
- Avago-Broadcom deal: This $37.0-billion affair merged Avago Technologies Limited (NASDAQ:AVGO) and Broadcom Corporation (NASDAQ:BRCM) to create the current iteration of Broadcom Inc (NASDAQ:AVGO).
- Intel-Altera deal: In this acquisition, Intel Corporation (NASDAQ:INTC) spent $16.7 billion in cash to acquire Altera Corporation.
- NXP-Freescale deal: This early buyout cost NXP Semiconductors NV (NASDAQ:NXPI) $6.3 billion in cash and $5.6 billion in NXP stock.
One thing that struck me then was the size of the deals; they got bigger with time.
You can see that above. The NXP-Freescale deal was completed at the start of December 2015. Then, by the end of that month, Intel bought Altera. Two months later, Avago completed its merger with Broadcom.
I listed them in reverse order so you can see how little antitrust authorities care about consolidations. The U.S. government simply won’t block a deal as long as the companies are improving products.
We’re already starting to see the same trend with marijuana stocks.
Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB) has been aggressively buying every company within sight, just so it can oust Canopy Growth Corp (OTCMKTS:TWMJF, TSE:WEED) as the market leader. Canopy Growth might respond in kind.
There have been mergers, acquisitions, reverse takeovers—all sorts of fancy tricks that keep lawyers and bankers well fed.
As an investor, you can leverage these mergers/acquisitions into investment gains.
Largest M&As Till Now
It’s important to remember that, although legal marijuana is a young industry, it’s growing faster than anyone expected. It moves through the business cycle in a flash.
Just three or four years ago, the industry was obsessed with educating the public about legal marijuana. Now the focus is on production. Marijuana needs to be produced in greater quantities to meet the rising demand in legalized territories.
And that means expansion. One way is to build new facilities. Another is to merge.
Before we give you our list of the most likely marijuana acquisitions, here’s a quick history on the largest M&As till now.
1. Aphria Inc (OTCMKTS:APHQF, TSE:APH) buys Broken Coast Cannabis for $185.0 million. This deal was finalized in the middle of January 2018. You might recognize Aphria as one of the biggest Canadian marijuana stocks. It bought Broken Coast for its 26,000-square-foot facility, plus other projects it has on the go, which in total brought the company’s capacity to 230,000 kilograms.
2. Constellation Brands, Inc. (NYSE:STZ) invests $191.0 million in Canopy Growth. You may have drunk a “Corona” before, but you may not know it’s owned by Constellation Brands. That alcohol giant decided to make an early move into the marijuana space by investing in a leading Canadian marijuana stock (all the big mergers tend to revolve around Canadian marijuana legalization because weed is still illegal under U.S. federal law).
3. Canopy Growth absorbs Mettrum Health Corp. for $283.0 million. Canopy Growth made a huge purchase when it bought Mettrum Health, but that deal was made entirely in stock. Considering that the deal gave Canopy Growth 40,000 new medical marijuana patients, and that it happened before Canada officially legalized cannabis, it was incredibly ambitious.
4. Aphria acquires Nuuvera Inc. for $670.0 million. Did you think Aphria stopped at one acquisition? Of course not. As soon as consolidation turned into an arms race, the company bought Nuuvera, a medical marijuana company with expansive operations overseas. Because of that deal, Aphria is now active in 11 different countries.
5. Aurora Cannabis buys CanniMed Therapeutics for $852.0 million. When this deal was announced, it was far and away the biggest merger in the cannabis industry. Perhaps that’s why it was so contentious. CanniMed’s board rejected the offer from Aurora at first, then flirted with a different suitor before ultimately returning to Aurora’s initial offer. Aurora stock crashed amid the chaos, but I personally think the company is well positioned for the future.
And finally, the big one:
6. Aurora Cannabis agrees to buy MedReleaf for $3.2 billion. You can say a lot of things about Aurora’s acquisitions, but “timid” is not one of them. The ambition is jaw-dropping. Any company that can follow the CanniMed fiasco with a $3.2-billion all-stock purchase is not a company you want to mess with, especially when that deal makes it the largest marijuana stock in the world.
Marijuana Stock Takeover Targets
The Aurora-MedReleaf deal raised the bar for marijuana acquisitions. Barely one year ago, companies were paying $185.0 million for expansion. Now that cost has jumped straight into the billions, making it hard for anyone to go backward.
I expect this trend to continue.
Why, you ask? Simply because there are too many players in the field. The only questions left are who’s buying and who’s selling.
On the buy side, I expect Canopy Growth to make a move. It has the most to lose from the Aurora-MedReleaf deal, so we might see a Canopy Growth merger with either:
- Cronos Group Inc (NASDAQ:CRON)
- Hydropothecary Corp (OTCMKTS:HYYDF, CVE:THCX)
- Aphria Inc
Let’s go through them one at a time.
If Canopy Growth makes a bid for Cronos, it’ll be to expand its international reach via Cronos Group’s global subsidiary network. It would be a smart move. Cronos has exactly the kind of geographical diversification that could put Canopy Growth stock back on top.
Price Tag: $1.1 billion or more.
On the other hand, Canopy Growth could focus on monopolizing market share within Canada, since it knows that political risk is close to zero at home. If the company goes in this direction, I’d bet that Hydropothecary is on the shortlist.
It is a major player in Quebec—Canada’s French-speaking province—and it’s in possession of a valuable distribution contract with the provincial liquor board.
Price Tag: $766.7 million or more.
While the other two acquisitions would put Canopy Growth back in the driver’s seat, there’s no power move quite like buying Aphria. But will it happen? And should Canopy Growth consider an Aphria takeover, or would it set the company up for financial ruin?
I’m not sure.
But the fact remains that Canopy Growth can’t be seen doing nothing in response to the Aurora-MedReleaf deal, so I’d wager that there’s more M&A around the corner.
I recognize this trend, dear reader. I’ve seen it before in mining and energy.
During the shale oil boom, prospectors would meet in bars and restaurants to negotiate handshake deals. They would unfurl maps on beer-stained tables, carve out territories, and head out into the wilderness to make their fortunes.
But then, a few years later, they were all stuck in conference rooms, burying the competition under mountains of cash. Marijuana has made that shift as well.