Will the entry of this Canadian company disrupt the US cannabis market?
The legalization of marijuana in the United States could be years away from becoming a reality. However, that doesn’t stop Canadian cannabis companies from taking a position in advance. They want to be ready to go when the market opens up, and that’s why there’s been an uptick on the mergers and acquisitions (M&A) front lately.
Last week, Valens (NASDAQ: VLNCF) became the latest name to announce its entry into the US market with the acquisition of Green Roads, a US company that manufactures hemp-derived cannabidiol (CBD) products. Let’s take a closer look at what this means for Valens and for the industry in the United States.
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What this move brings to Valens
On a pro forma basis, Valens says the combined companies would have brought in C$111.6 million in revenue last year. Over the past 12 months, Valens has recorded revenues of C$72 million, which means that Green Roads generates approximately C$40 million in sales on an annual basis.
But the deal is more about increasing Valens’ income. Overall, it’s about gaining traction in the US and potentially tapping into Green Roads’ distribution network. The company’s products – oils, edibles, capsules and even coffee – are sold in 7,000 outlets across the United States. The company focuses on wellness, and its online shoppers can choose products based on whether they’re looking to improve sleep, relax, reduce stress, or relieve pain.
Valens is spending $40 million in cash and stock on the deal, and he expects the deal to close as soon as next month. It would then be able to incorporate into its operations what it says is the largest (private) CBD business south of the border. The deal can be made because it’s not against US federal law, since Green Roads’ products come from hemp, which the US government legalized in 2018 as part of the Farm Bill.
Should multistate operators be worried?
The entry of another Canadian cannabis company into the U.S. market is unlikely to worry major multi-state cannabis producers like Trulieve Cannabis Where curafeuille. They focus on hemp-free products that contain high levels of tetrahydrocannabinol (THC), which can reach a wider customer base. (Hemp products cannot contain more than 0.3% THC.) So while the acquisition of Green Roads will open up new opportunities for Valens, it won’t compete in all of the same categories as large multi-state operators.
Brightfield Group predicted last year that by 2025 the CBD market in the United States (which includes hemp) will reach $16.8 billion. According to BDSA forecasts, the total U.S. pot market (including THC products) will reach $34.5 billion in the same year.
Exploiting the hemp market only gives Valens a small slice of it all. But it’s not unlike the steps other Canadian cannabis companies took to gain exposure in the United States before legalization. Aurora Cannabis acquired CBD product maker Reliva last year, and in 2019, Chronos acquired Lord Jones, a maker of CBD beauty products.
The acquisition of Green Roads by Valens is just the latest example of Canadian companies trying to position themselves ahead. And while that won’t shake up the industry today, the battle lines are being drawn in what will eventually become a much more competitive cannabis market after legalization.
Is Valens a buyer on this news?
Today, Valens is a decent buy, trading at around 7x its sell. Although it is a bit expensive, considering that the average stock in the Horizons Marijuana Life Sciences ETFs trades at a multiple of less than 6, it’s a bargain compared to big names like Cronos and canopy growth, where investors pay 62 and 25 times sales, respectively. Adding green routes to the mix will help reduce the Valens multiple even further.
Over the past year, Valens’ stock has risen 84%, matching the performance of the Horizons ETF. For investors looking for a well-valued stock with exposure to the US market, Valens may be a good option. But investors will want to be careful, because by the time legalization takes place, things could be very different.
In its press release announcing the acquisition, Valens indicated that it had analyzed more than 100 companies in the CBD space before choosing Green Roads. This tells me that there could still be a lot of M&A activity to come.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging 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 wealthier.
