Marijuana stocks to watch.
Consolidation is one strategy for marijuana companies to survive the burgeoning market and emerge ahead of competitors. The Canadian marijuana market has potential for mergers and acquisitions because “big food and pharma” will look toward the licensed producers to be strategic partners, says Brett Hundley, a senior analyst at investment bank Seaport Global Holdings. Consolidation will also occur in the U.S., with American marijuana companies seeking deals with rivals in states, where recreational and medical use is legal. “We expect considerable consolidation within the U.S., since there are thousands of companies operating relative to a little over 100 in Canada,” he says. Here are seven marijuana companies that could seek acquisitions.
Hexo Corp. (ticker: HEXO)
In March, Hexo received a $65 million credit facility to fund expansion projects and acquired Newstrike Brands (NWKRF) in a stock acquisition valued at about 260 million Canadian dollars ($197 million). The Canadian marijuana producer could be “busy on the M&A front in 2019,” says Michael Berger, founder of Technical420. Berger says he wouldn’t be surprised if Hexo made additional acquisitions, merged with a similar-sized company, received a massive investment or became acquired. “Hexo is attractively valued when compared to its peers,” he adds. Hexo could seek strategic partners potentially, such as Campbell Soup Co. (CPB), since the company’s lackluster performance would use Hexo’s production and technology to reinvigorate its brand, Hundley says.
Stem Holdings (STMH)
A Boca Raton, Florida-based vertically integrated cannabis company, Stem owns cannabis facilities in Nevada, Oklahoma and Oregon. One of the most exciting themes in the cannabis industry has been the emergence of the U.S. multistate operator, Berger says. “These cannabis retail companies are levered to burgeoning state markets in the U.S. and we are favorable on many of these opportunities.” Stem Holdings is an MSO that is “flying under the radar,” he says. “During the last year, we have seen significant consolidation of MSOs and this is a trend that we expect to continue. When compared to its peers, Stem Holdings has an attractive valuation and this is an opportunity that we are watching.”
1933 Industries (TGIFF)
1933 Industries, a Vancouver-based cannabis company, owns stakes in several companies, including 91% in Alternative Medicine Association, a Las Vegas-based licensed cultivator of medicinal cannabis. “The market cap of the company has not been blown out and the company is building products that other cannabis companies can purchase,” says Chris Parry, a Canadian-based consultant in technology, health care and marijuana marketing. It’s a very scalable business and the company can be plugged in into a bigger play. “1933 is set up in a way to supply a bigger brand that will generate revenue, has some good assets and will be a good partner for other marijuana companies.”
The Green Organic Dutchman (TGODF)
The Green Organic Dutchman, a Canadian organic cannabis producer, could be a potential candidate because it is an early leader in producing organic-grade cannabis, which could be used in a branding effort to convey quality or health and wellness attributes, says Hundley. The Green Organic Dutchman began trading on the Toronto Stock Exchange in May 2018 after raising CA$132.26 million from its initial public offering. The marijuana producer began construction of four facilities with a total capacity of 195,000 kilograms in Canada, Europe and the Caribbean. The grower also plans to build a 40,000-square-foot research and development center, which will have space to develop new products, such as cannabinoid-infused beverages.
Organigram Holdings (OGRMF)
A Canadian marijuana producer, Organigram’s management team knows how to operate in the cannabis industry, Parry says. Organigram has generated a portfolio of adult-use recreational cannabis brands like Edison Cannabis Co., Ankr Organics, Trailer Park Buds and Trailblazer. The company’s primary facility is located in Moncton, Canada. The company could be acquired by a Canadian competitor, he says. “Organigram’s share prices have run pretty high,” Parry says. “There is still a lot of value there and investors are still getting a pretty good price.”
Aurora Cannabis (ACB)
Aurora Cannabis, one of the largest licensed medical cannabis producers in Canada, could be a target for a deal. Its acquisitive history could be attractive to a potential buyer. The company acquired privately held Whistler Medical Marijuana Corp. in an all-stock deal for CA$175 million in January 2019. Aurora Cannabis, which has sales and operations in 24 countries across five continents, also holds a stake in several companies, including an 11% stake in The Green Organic Dutchman. Aurora Cannabis could be an acquisition candidate, since activist investor Nelson Peltz became a strategic advisor in March and the company has “built an early lead on geographic expansion alongside clinical trial work,” Hundley says.
Chemesis operates in California, Puerto Rico and Colombia, including cultivation, manufacturing, distribution and retail. The Canadian producer distributes and transports California Sap, Jay and Silent Bob’s Private Stash as well as third-party brands to more than 600 dispensaries in California and Puerto Rico. “The company could supply a global brand in tinctures and edibles,” Parry says. “They will have brands in five to six U.S. states and offer an instant cross country platform.” Consolidation in the marijuana market will increase and companies which have less debt will become the leaders, he says. “It’s gold rush time, since the industry has not matured yet,” Parry says. “It’s going to come back to the balance sheet.”
Pot stocks that may be takeover targets.
— Hexo Corp. (HEXO)
— Stem Holdings (STMH)
— 1933 Industries (TGIFF)
— The Green Organic Dutchman (TGODF)
— Organigram Holdings (OGRMF)
— Aurora Cannabis (ACB)
— Chemesis (CADMF)
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