Prior to it becoming a popular meme stock earlier this year, Sundial Growers (SNDL 2.08%) was nothing more than a struggling cannabis business that may have found it difficult to stand apart from other pot stocks.
However, cash can change a company's prospects and its outlook for the future. With an influx of cash plus multiple acquisitions this year, Sundial Growers is a much different business and is now a top cannabis retailer in Canada. But with the company still holding hundreds of million of dollars worth of cash on the books, it may not be done wheeling and dealing. Should investors expect another acquisition in 2022?
Mergers and acquisitions remain in its plans
Sundial acquired retail cannabis business Inner Spirit earlier this year for $131 million Canadian dollars. Most recently, in October, it announced it was buying liquor store operator Alcanna for CA$346 million (which, through a subsidiary, also has pot shops in its portfolio). Unlike the Spiritleaf acquisition, that deal hasn't closed yet and may not be complete until early next year.
Sundial has clearly had an appetite for deals of late. And in its most recent earnings report (for the period ending Sept. 30), it stated that it is evaluating "numerous potential investment opportunities in the cannabis industry," specifically noting mergers and acquisitions as an option. As of Nov. 9, Sundial reported unrestricted cash of CA$571 million.
Multiple attractive options out there
A big reason Sundial might be considering making a purchase soon is that cannabis stocks have been struggling and valuations are low. Over the past six months, the Horizons Marijuana Life Sciences ETF has fallen more than 30% (Sundial is down 33%) while the S&P 500 is up by more than 10%.
Two examples of cannabis retail businesses trading at modest market caps that Sundial could afford are High Tide, worth approximately CA$400 million, and Fire & Flower, which has a valuation of just over CA$200 million. Both are among the top retail pot stocks in Canada and could be viable investment options if Sundial were to expand its presence into that segment of the market.
However, investors don't need to assume that Sundial will be limited to companies whose market caps fall within its cash balance. In the Inner Spirit deal, the company paid a combination of cash and stock. And for the pricier Alcanna acquisition, that was an all-stock transaction.
Should you expect a deal from Sundial Growers next year?
Given how aggressive Sundial has been this year wheeling and dealing and the low-cost opportunities out there for it to pursue. It wouldn't surprise me the slightest if the company were to make another big move in 2022. It may not necessarily be an acquisition, but Sundial has been showing that it is looking to put its improved resources and stronger balance sheet to work (it often boasts of it having a stockpile of cash along with no debt).
Plus, the company is already actively looking at investment opportunities through its joint venture, SunStream Bancorp, which it created with private equity firm SAF Group in March. It would also be advantageous for it to cash in on its popularity with retail investors, and one way to stimulate interest is by announcing a key acquisition.
Sundial is full of potential, but it's still a risky buy
There is a big opportunity ahead for Sundial to grab market share via acquisitions given its strong financial position. But with the company still relying heavily on stock issues to fund transactions, the danger to investors is that there could be more dilution in the future.
This stock has the potential to be a big winner next year if its recent deals come together and strengthen its financials (the company has generated just CA$47 million in revenue over the past 12 months while its net losses have totaled CA$239 million).
However, there are too many "ifs" out there for it to be a surefire winner. If you can tolerate the risk, then Sundial may be worth taking a chance today. If you can't, you may be better off going with these leading cannabis stocks instead.