Why Cannabis Investors Should Expect More Mergers and Acquisitions

Aurora Cannabis Inc.’s (TSX:ACB) recent acquisition attempt of CanniMed Therapeutics Inc. (TSX:CMED) could be a sign of things to come.

| More on:

Aurora Cannabis Inc. (TSX:ACB) recently announced its plans to acquire CanniMed Therapeutics Inc. (TSX:CMED) in an all-stock takeover. Initially, Aurora had made a proposal to CanniMed’s board of directors with a November 17th deadline. However, with the deadline having come and gone, Aurora has now made a formal takeover offer.

Aurora’s CEO, Terry Booth, believes the companies would be a “great fit, truly complementary, and I am convinced we can generate even greater value by combining the two companies and aligning our efforts strategically.”

With a combined market cap of about $3 billion, the companies would seek to rival the biggest player on the Cannabis scene, Canopy Growth Corp. (TSX:WEED), which has a market cap of $3.5 billion.

However, CanniMed was unimpressed with the proposal. Before the takeover offer, CanniMed entered an agreement to buy Newstrike Resources Ltd. (TSXV:HIP), a cannabis stock on the venture exchange that is backed by the iconic Canadian music group, the Tragically Hip.

Cannabis companies are still relatively small

At market caps of just $3 billion, whether the takeover goes ahead or not, both Canopy and Aurora are still only classified as mid-cap stocks, with $10 billion signifying a big-cap company. There are plenty of successful mid-cap stocks that are good buys, but when the industry leaders are in this range, that suggests there might be bigger players out there, and more consolidation could take place.

Lack of moat is one problem I see in the industry, where a big player could enter the cannabis market at a later date and acquire companies like Canopy and Aurora. A lot of legal uncertainty is keeping many big players on the sidelines, and that could change as more issues are sorted out and we get closer to legalization day.

Why consolidation in the industry is inevitable

We’ve seen a lot of new cannabis stocks get listed on the TSX and the venture exchange in the past year. Canopy has already been in acquisition mode, trying to extend its reach, and with a lot of small suppliers in the industry, there is a lot of potential for larger companies to easily grow their market share via acquisition.

In a fragmented industry like cannabis, it’s not uncommon to see lots of consolidation.

Why you may want to wait before investing in cannabis stocks

Cannabis stocks are growing very fast, and there’s a danger that valuations could be getting too high. The new industry is seeing many new entrants, and even Aurora has only been on the TSX since July. There’s a lot of change in the industry, and with legalization still more than half a year away, the landscape could look a lot different from where it is at today.

From a valuation standpoint, there certainly aren’t any deals to be had at these prices. Although it may be tempting to jump on board, so you don’t miss the ride, at this point, there looks to be more risk that valuations are inflated and could be due for a correction.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any stocks mentioned.

More on Investing

Canadian Dollars
Stock Market

Where to Invest $5,000 in April 2024

Do you have some extra cash to spare? Here are five companies to invest $5,000 in next month.

Read more »

Plane on runway, aircraft
Stocks for Beginners

Up 53% From its 52-Week Low, Is Cargojet Stock Still a Buy?

Cargojet (TSX:CJT) stock is up a whopping 53%, nearing closer to 52-week highs from 52-week lows, so what's next for…

Read more »

Question marks in a pile
Bank Stocks

Should You Buy Canadian Western Bank for its 4.8% Dividend Yield?

Down 35% from all-time highs, Canadian Western Bank offers a tasty dividend yield of 4.8%. Is the TSX bank stock…

Read more »

Gold bars
Metals and Mining Stocks

Why Alamos Gold Jumped 7% on Wednesday

Alamos (TSX:AGI) stock and Argonaut Gold (TSX:AR) surged after the companies announced a friendly acquisition for $325 million.

Read more »

tsx today
Stock Market

TSX Today: Why Record-Breaking Rally Could Extend on Thursday, March 28

The main TSX index closed above the 22,000 level for the first time yesterday and remains on track to post…

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »