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3 Things to Really Like About Canopy Growth's Latest Acquisition

By Keith Speights - May 29, 2019 at 7:00AM

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The Canadian marijuana producer's recent small deal could be a bigger deal over the long run.

Canopy Growth ( CGC -3.57% ) attracted a lot of attention for its acquisition that isn't yet an acquisition. I'm referring to the Canadian marijuana producer's $3.4 billion deal that gives it the right to buy Acreage Holdings if and when the U.S. revises federal marijuana laws in a way that would allow the acquisition to go through.

But there's a more recent acquisition by Canopy Growth that doesn't have any hurdles to jump. Canopy announced last week that it acquired skin care and sleep solutions company This Works. Because the transaction is relatively small -- only around $55 million -- it hasn't been a huge story for Canopy Growth. However, there are three things for investors to really like about this latest acquisition.

Woman drawing a big fish about to eat a small fish on a wall.

Image source: Getty Images.

1. No snoozing when it comes to a huge opportunity

In addition to its skin care products, This Works markets sleep solutions including pillow sprays, night oils, bath soaks, and shower gels that promote sleep. Selling products that help people sleep better presents a big potential market for Canopy Growth. 

Earlier this year, Canopy Growth founder and co-CEO Bruce Linton listed the sleep aid market as one of four multibillion-dollar industries that the company hopes to disrupt. Linton told CNBC's Jim Cramer that he even thinks that cannabis could be the primary competitor in the future to blockbuster sleep drug Ambien.

Cannabidiol (CBD) could be effective in promoting sleep. A 2013 preclinical study in rats found that CBD appeared to increase total sleep time. Earlier studies in humans found that individuals taking CBD slept significantly more than individuals on placebo. Although This Works' products currently don't include CBD, Canopy Growth plans to develop a new line of CBD-infused sleep products.

2. An international focus is smart

Too many investors are fixated on the Canadian cannabis market. But international markets should be a much larger source for long-term growth. Canopy Growth's acquisition of a company based in England that distributes its products in major international markets is smart.

Canopy already established a joint venture in the United Kingdom to focus on cannabis-based medical products earlier this year. The addition of This Works strengthens the company's presence in the important U.K. market.

This Works' products are also sold across the rest of Europe, in China, and in the U.S. Market researcher Brightfield Group projects that the market for CBD products in Europe will grow very quickly, from $318 million last year to nearly $1.7 billion by 2023.

3. A potential key part of a successful U.S. strategy

Canopy Growth was quick to move following the legalization of hemp in the U.S. thanks to the signing of the 2018 farm bill into law in December. The company announced in January that it would build a major hemp production facility in New York state. Picking up This Works could help facilitate Canopy's U.S. hemp strategy.

The key to success in the U.S. isn't growing hemp. Instead, it's developing and marketing hemp-derived CBD-infused products that customers want. This Works gives Canopy an established line of products that it can infuse with hemp CBD and sell in the U.S.

Linton stated in the company's quarterly conference call in February that Canopy expects to have hemp CBD products on the market in the U.S. by the end of 2019. With This Works now "under the canopy" and construction starting soon for its hemp production facility, the company could be in great shape to meet that goal.

Plenty of cash left in the coffers

There's also one other thing for investors to like about Canopy's acquisition of This Works: It leaves Canopy with a lot of cash remaining to fund further acquisitions. At the end of 2018, Canopy had cash, cash equivalents, and marketable securities of close to $3.6 billion.

It's also important to remember that the acquisition of This Works doesn't rule out the possibility that Canopy could partner with a leading cosmetics company. So far, Tilray is the only Canadian cannabis producer to announce a big deal along these lines with its partnership with Authentic Brands Group (ABG). There are many other big players in the cosmetics and wellness industries that may want to team up with Canopy Growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.

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