Canopy Growth Corp., the largest company in Canada’s rapidly developing marijuana industry, agreed to buy competitor Mettrum Health Corp. for about C$430 million ($321 million) to expand production as the government moves toward legalization.
The all-stock deal values Mettrum at C$8.42 a share, the companies said Thursday in a statement, representing a 42 percent premium to Wednesday’s closing price.
Marijuana companies rose in Toronto trading, extending huge gains this year, with Canopy’s shares quadrupling. Canada’s plan to legalize recreational use in 2017 has attracted a wave of capital in anticipation of billions of dollars of new revenue.
Expectations were further heightened on Wednesday after the country’s Task Force on Marijuana Legalization and Regulation delivered a report to the government on how the drug should be legalized and regulated. The group said its recommendations will be made public in mid-December. The market value of Canada’s six largest marijuana companies has swollen to more than C$3.6 billion.
Canada is the best marijuana play for investors because it is the first member of the Group of Seven countries that is moving toward legalization, and there could be C$7 billion in sales by 2024, said Mason Brown, an analyst at M Partners. Still, how the country will regulate, tax, market and distribute the products remains unknown and could affect margins and revenues, he said.
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Further consolidation will probably occur as bigger players make acquisitions, Brown said. There’s more than 35 licensed companies currently, and an increase of deals will probably leave five to eight companies controlling the bulk of the market, he said.
“There’s quite a bit of risk because there’s a lot of unknowns,” Brown said in a telephone interview. There are some companies “that we still think have upside from here even with all the risk associated with it,” he said.
“One overvalued company buying another one doesn’t really add up,” and Canopy’s move to acquire Mettrum may be more about absorbing the competition to control excess cannabis in the market, Chris Damas, an analyst at BCMI Research in Barrie, Ontario, said in a note. It’s possible that Canada will issue fewer licenses for producers, which makes buying the existing 36 licenses more important, he said.
Aurora Cannabis Inc., with a market capitalization of more than C$700 million, is too large to be bought but may be looking at acquisitions, Damas said. Aphria Inc. and Organigram Holdings Inc. are probably going to look at merging, according to the note.
If legalization occurs along expected timelines, there will be about 3.8 million legal recreational users in Canada by 2021 with the potential for C$6 billion of sales, Canaccord Genuity analysts Matt Bottomley and Neil Maruoka said earlier this week in a note.
Canopy said buying Mettrum will reduce costs, boost its total licensed production area to about 665,00 square feet (61,781 square meters) and add the Mettrum Spectrum brand of marijuana.
“Mettrum has established a line of cannabis products that work well in a medical context and will transition naturally into a natural and healthy lifestyle market,” Bruce Linton, the co-founder and chief executive officer of Smiths Falls, Ontario-based Canopy, said in the statement.
Mettrum climbed 28 percent to C$7.57 at 2:26 p.m. in Toronto while Canopy rose 1.1 percent to C$11.93. Among other marijuana companies, Aphria gained as much as 11 percent and ICC International Cannabis Corp. — which listed on the TSX Venture Exchange earlier this week — 33 percent.
The industry is waiting to see what the task force’s report says on guidelines for marketing recreational cannabis and timelines for legalization, said Denis Arsenault, the CEO of OrganiGram Holdings Inc., another Canadian marijuana supplier. There’s a lot of excitement regarding the burgeoning industry, he said.
“You’d have to go back to literally something like Prohibition to see the birth of an industry like this,” Arsenault said Wednesday in an interview with Bloomberg TV Canada.
Meanwhile in the U.S., Innovative Industrial Properties Inc., said it sold 3.35 million shares at $20 each in an initial public offering. The company is a real-estate investment trust, or REIT, that focuses on acquiring and managing properties leased to state-licensed producers of medical marijuana. The shares fell to $19.65 in their first day of trading in New York.