The marijuana industry continues to consolidate in 2021. One of the more under-the-radar acquisitions of late was Canadian company HEXO's (NYSE:HEXO) agreement to buy its compatriot and peer 48North Cannabis (OTC:NCNNF), announced in mid-May.
In this Motley Fool Live conversation with healthcare and cannabis bureau chief Corinne Cardina, longtime Fool contributor Eric Volkman takes a brief look at the deal and sizes it up. This clip was recorded on May 21.
Corinne Cardina: Canadian pot company HEXO is continuing on a buying spree, so its latest acquisition is buying out its competitor, 48North.
They've also done a couple of other recent deals. In February, they announced that they were buying a rival called Zenabis Global and then earlier this month, it also entered the Colorado market.
So with this latest deal for 48North, HEXO's CEO did an interview with MJBiz Daily. He said that the deal is about competing in Canada's super-premium flower category, but also establishing intellectual property for cannabinoid-infused cosmetics for U.S. expansion.
Let's talk about this one. Do HEXO's recent acquisitions make it a more attractive stock, or could it be biting off more than it can chew?
Eric Volkman: I don't think they are biting off more than they can chew. I mean, what they're doing, it seems to me is they're chasing market share. They can talk about these special CBD products for the American market. That's all well and good but basically their ambition [is], they've stated they want to be one of the top two in terms of market share in their native Canada.
Canadian producers -- or Canadian weed companies in general -- they're vertically integrated. They're bottled up in Canada, outside of acquisitions -- and even very limited with that -- they can't enter the U.S. market. Because as we all know, on the federal level, marijuana is illegal there. So they're basically limited to the local market.
Which is nice in one way because Canada is completely legal for any type of marijuana. The only problem is it's Canada; in terms of population, it's much smaller than the U.S. and you have so many companies there trying to elbow their way into the market and make some more money.
So HEXO is going for share, that was more of a motivation with the Zenabis Global deal, which was a bigger deal. That was 235 million Canadian ($194 million) all in stock. The 48North was only 50 million Canadian ($41 million), so slightly smaller scale.
To me [48North] is not cheap for HEXO, but because they're spending in stock, there's an advantage there. Again, they save precious cash resources, which nobody has enough of in this industry. They have a clear strategy to really carve out much more of a presence there.
They also see the companies at the top of the food chain in Canada. Canopy Growth, Aurora [Cannabis]; those guys are stumbling. I feel that they sense that there's some blood in the water and they can jump in and be, if not the big fish, at least a bigger fish than they are now.