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Canopy Growth Corp. (TSX:WEED) Acquires the Acquirer

Top marijuana growth stock Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) has successfully made a more superior offer for all the outstanding shares of Hiku Brands Company Ltd. in a transaction announced near market close on July 10. Both stocks closed in positive territory the next trading day.

Interestingly, Hiku was in the process of acquiring a smaller competitor WeedMD Inc (TSXV:WMD) at a 60% premium to market in a friendly all-stock merger deal announced on April 19 this year. Upon completion of the Hiku-WeedMD transaction, existing Hiku and WeedMD shareholders were to own approximately 51.75% and 48.25% of the combined company, respectively, on a fully diluted basis.

Canopy Growth made a superior offer to the acquirer’s shareholders and concluded a deal before WeedMD shareholders could vote on the earlier merger on July 11. The market has shown its approval of this latest deal by lifting the share prices for both Canopy and Hiku by 2.2% and 20%, respectively, by end of trade on Wednesday.

WeedMD plunged nearly 16% for the day, but the company has received a $10 million severance package as a deal termination fee. Newstrike Resources Ltd. suffered a similar fate when Aurora forced its acquisition of CanniMed earlier this year. Newstrike stock consistently lost value afterward and is currently trading 84% lower than its January 9 closing price at the time of writing.

What is Canopy Growth getting in Hiku?

Hiku Brands has been a much focused cannabis brand portfolio builder in the retail space, and the small licenced producer will add significant value to Canopy Growth’s recreational cannabis adult use brand portfolio.

The small player holds two highly visible subsidiaries, namely Tokyo Smoke and DOJA Cannabis Ltd.

Hiku’s subsidiary, Tokyo Smoke, operates a chain of retail stores selling coffee, clothing and curated cannabis accessories across British Columbia, Ontario, and Alberta. The Tokyo Smoke brand has come to resonate well with the potential recreational market and won Brand of The Year in the highly regarded 2017 Lift Cannabis Awards. It came second in the Top Cannabis Accessories Shop in Eastern Canada category in the same awards last year.

Tokyo Smoke is among the four successful applicants to be awarded master retail licences in Manitoba, and Canopy Growth will become a holder of two of these high potential licences after this acquisition deal, thereby giving the leading cannabis giant an enviably dominant position in that province.

Further, Hiku’s planned expansion into Newfoundland and Labrador through a strategic investment in Oceanic Releaf Inc. may add up to five new retail locations in a province in which Canopy already has an 8,000 kilogram per annum supply deal for the first 12 months of recreational sales.

The other Hiku subsidiary, DOJA Cannabis Co., is a craft grower with two production facilities located in British Columbia. Craft growers do command some valuation premiums, as they are likely to defend higher per gram cannabis prices in the adult use market given that they may hold better appeal for connoisseurs, making the products more likely to survive commoditization.

Hiku seems a good strategic fit with Canopy’s brand portfolio.

Investor takeaway

I am not a big fan of high premium acquisitions in an already highly priced cannabis stock market, but a 21% premium on a small player isn’t that significantly dilutive, and Canopy Growth is buying some asset that strengthens its portfolio of retail and adult use marketing channels, thereby broadening its product market reach.

Normally, the acquirer trades lower after an acquisition news release, but the news had different effect on Canopy this time around. It appears to be a great deal for both sides and, interestingly, could make Aphria Inc. an investor in Canopy through its interest in Hiku.

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Fool contributor Brian Paradza has no position in any of the stocks mentioned.

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