Legal cannabis is projected to explode from $6.7 billion last year to become a $100 billion market.
That rapid growth is attracting entrepreneurs and capital to create new businesses.
The cannabis market is still in the early innings. Yet we already see the major players making moves to consolidate their dominance of the market.
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With merger and acquisition activity heating up, some investors are making big profits.
That’s because the major players are buying up the smaller competitors at premium valuations.
Last week, Aurora Cannabis (OTC BB: ACBFF) agreed to buy CanniMed Therapeutics (OTC BB: CMMDF) for C$1.1 billion in a “friendly deal.”
That was the culmination of a two-month acquisition effort. During the time, Aurora increased its proposed acquisition price from $24 per share to $43.
Prior to the proposed deal, CanniMed shares traded around C$15. That means Aurora is agreeing to pay a 187% premium.
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Once the deal closes, this will be the biggest Canadian cannabis acquisition since 2016. That’s when Canopy Growth (OTC BB: TWMJF) – the largest cannabis producer in Canada – bought Mettrium Health for $430 million.
Shares of the major Canadian cannabis stocks have been outperforming the small-cap stocks in the sector. That means they’re able to raise capital at higher valuations. Plus, they can use their stock as currency to fund acquisitions.
Looking forward, I’d expect to see increased M&A activity from major players including Canopy Growth, Aurora Cannabis, Aphria (OTC BB: APHQF) and MedReleaf (OTC BB: MEDFF).
Many of these smaller cannabis companies will be acquisition targets. This is particularly true of companies that are creating “value added” products, beyond simply producing dried cannabis.
Fortune 500 Company Invests in Legal Cannabis
It’s not just existing cannabis companies that are getting in on the deal-making.
Late last year, we saw Constellation Brands (NYSE: STZ) make a strategic investment in Canopy Growth.
Constellation invested C$200 million for a 10% stake in Canopy.
It’s a big deal for several reasons.
First, Constellation is in the alcohol business; it owns brands including Corona, Robert Mondovi, Canadian Whiskey and Svedka.
Constellation plans to work in partnership with Canopy to develop a cannabis beverage. That move is likely designed to let the company capitalize on the growth in cannabis, while protecting its alcohol business.
Second, Constellation is a big business. It’s valued at $43 billion and generates over $7 billion in annual sales. While the cash investment in Canopy is small for Constellation, it indicates the company’s interest in securing a leading spot in this growth sector.
It’s likely that we’ll see additional companies in the alcohol, tobacco, and pharmaceutical space forming strategic partnerships with Canada’s cannabis companies. In an effort to secure their own financial future, these companies will want to get exposure to this growth market.
Increased capital investment and M&A activity is good news for people who own pot stocks.
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