The recent merger involving pot giants Tilray and Aphria is one of the largest deals that the industry has seen in a while. But with 2021 looking challenging for the economy as the COVID-19 pandemic continues to create uncertainty, there could be more consolidation to come this year, especially if the markets crash and it gets more difficult for cannabis companies to raise money.

One company cannabis investors should keep a close eye on is Sundial Growers (NASDAQ:SNDL). In its most recent earnings report, Sundial dropped a small but significant hint that it could be a buyer or a seller in a potential transaction. And the company has been busy since then, suggesting that something big could be on the horizon.

Marijuana leaf atop a map of Canada.

Image source: Getty Images.

Where there's drama...there's a potential deal brewing

There's one company that's been of interest to Sundial Growers of late, and that's microcap cannabis stock Zenabis (OTC:ZBISF). On Dec. 30, 2020, Sundial announced it had acquired a special purpose vehicle that at the time owned 58.9 million Canadian dollars worth of Zenabis's senior secured debt. Sundial will also collect a royalty under the agreement of between 2% and 3.5%, depending on the company's net cannabis revenue.

Zenabis made a payment on that debt of CA$7 million on Dec. 31, 2020, but Sundial still issued it a notice of default. Zenabis contests the default and, in a statement issued on Jan. 6, says that "Sundial made such investment in an attempt to coerce Zenabis into being acquired by Sundial." Zenabis says that prior to Sundial's investment, it was in discussions with its lender to get an extension on its CA$7 million debt repayment. As of Sept. 30, 2020, the company reported cash and cash equivalents of just CA$4.8 million, and so liquidity is a clear concern for Zenabis.

Over the nine-month period ending Sept. 30, 2020, Sundial reported net revenue of CA$47.1 million. Zenabis, meanwhile, posted sales of CA$71 million over the same period, giving Sundial plenty of motivation to acquire the troubled cannabis company if it were to decide to go that route. However, with only CA$110 million in cash reserves available just before buying Zenabis's debt, Sundial isn't sitting on a boatload of money and may not be in a strong enough financial position to make a big move.

Sundial could end up being the acquiree in a transaction

When management announced on Nov. 11, 2020, that Sundial was undergoing a "strategic alternatives review," it didn't specify whether it would be the buyer or seller in any potential deal, only that it will "ensure that all opportunities to maximize value are explored."

And if Sundial is considering anything, including a merger or being acquired, there's a much better chance of some sort of deal coming together. One company that's been interested in some M&A activity is Aurora Cannabis. Aurora was in talks with Aphria in the past about merging, and although that fell through, it could be looking for another suitor. However, that's just one example, and there could be other options out there, especially since an acquisition could be a quick way for a cannabis company to bolster its sales numbers and increase market share, potentially making it look more attractive to investors.

Should you invest in Sundial today?

In just three months, shares of Sundial have soared more than 260%, largely due to these recent developments and the recent election results where five states passed marijuana reform, including four that legalized marijuana for recreational use -- Arizona, Montana, New Jersey, and South Dakota. The Horizons Marijuana Life Sciences ETF has jumped 78% during the same time frame.

Sundial's stock is scorching hot right now, but buying based on a potential deal is very risky, as there's no telling who it could partner with and whether investors will view the terms of the transaction favorably. Sundial is a pot stock worth watching right now, but investors shouldn't rush out to invest in it until after there's some clarity about its future and whether its strategic review will result in an acquisition. 

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.