When Canopy Growth (CGC 0.83%) announced plans to acquire Acreage Holdings in 2019, it was an innovative and unique way for the company to position itself for growth in the U.S. market ahead of legalization. Even though the deal still can't be completed due to the federal ban on marijuana in the U.S., it is a way for Canopy Growth to demonstrate to investors how it plans to succeed and grow when pot becomes legal.
Recently, another cannabis company, Fire & Flower (FFLW.F -44.37%), announced that it too would be making a similar move. Below, I'll take a look at the details of its deal and whether you should consider buying shares of this up-and-coming pot stock.
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Fire & Flower will license its brand and technology
As a top retailer in Canada, Fire & Flower has a valuable brand that it will allow American Acres, a private cannabis company, to use for its dispensaries in California, Arizona, and Nevada. The move is a good one as it will test the waters in those U.S. markets to see how well the Fire & Flower brand resonates with customers south of the border, effectively giving the company a dry run before actually expanding its business there. Fire & Flower expects that its first (branded) store will open during the first half of this year in Palm Springs, Calif.
Canopy Growth took a similar approach when management announced in October 2020 that it would launch its cannabis-infused beverages in the U.S. market in the summer of 2021. Although technically they wouldn't be Canopy Growth's products since they can't legally cross the border, Acreage will be creating them using the company's beverage formulations. Fire & Flower unfortunately can't do the same thing because it is a retailer, but by makings its brand available to American Acres, it can at least test the waters from a branding standpoint.
In addition to using Fire & Flower's name, American Acres is also going to use its Hifyre technology. Hifyre is a sales and analytics platform that helps cannabis retailers identify trends and personalize the shopping experience for customers. Through the platform, the company also utilizes Hifyre SPARK, a loyalty program that today has more than 100,000 members.
By deploying the technology in the U.S. along with its brand, Fire & Flower could conceivably grow its loyalty program without even technically being in the market yet. It can also help offer insights into how the company may need to change its Hifyre platform to meet the needs of U.S. customers and regulators.
The deal also gives Fire & Flower a purchase option
One of the biggest reasons for investors to be bullish on this deal with American Acres is that it also gives Fire & Flower the opportunity to acquire the company at a discount. Just like the Canopy-Acreage deal, the acquisition is contingent on the federal legalization of marijuana in the U.S.; while it can also be triggered if an exchange on which the Fire & Flower company operates permits the deal to go through, in all likelihood, it will be after the market is legal. And according to Canopy Growth CEO David Klein, this could be very soon. The exchanges will probably not want to jump the gun ahead of legalization, as the Toronto Stock Exchange (which is one of the exchanges Fire & Flower's stock trades on) has warned cannabis companies in the past not to run afoul of laws in the U.S., noting that if they do so, they face the risk of being delisted. In February, the company also announced it has submitted an application to trade on the Nasdaq.
While the deal remains on hold, it's similar to Canopy Growth's approach in that it gets Fire & Flower ready for when the U.S. pot market opens up to Canadian-based marijuana companies. By having its ducks in a row and strategy in place before that happens, Fire & Flower can be ready to take advantage of legalization as soon as it does. With convenience store operator Alimentation Couche-Tard owning 15% of Fire & Flower's business, the company already has some great expertise it can tap into once it is able to ramp up its growth strategy and dive into the U.S. Couche-Tard has over 7,100 stores in the U.S. (including the well-known Circle K brand), spanning 47 states.
Should you buy Fire & Flower stock?
These developments are exciting for Fire & Flower, but the one drawback here is that since American Acres is private, it is difficult to gauge how attractive of an opportunity this really is for the cannabis retailer. If the number of stores is minimal and American Acres doesn't command much market share, there may not be many gains for Fire & Flower from this deal, outside of having a quick way to get into the U.S. market.
The pot stock is an attractive buy given Fire & Flower's partnership with Couche-Tard and its position as a market leader in Canada, but investing based on this deal alone could be a risky move that sets expectations too high.
