The cannabis industry is ripe for more mergers and acquisitions to take place. Valuations are low and there's plenty of competition, giving businesses lots of incentives to try to acquire their way to more market share. One company that has been aggressive of late in using acquisitions to strengthen its financials is pot producer Sundial Growers (SNDL).
Sundial closed on a deal with alcohol retailer Alcanna just a few months ago. And management has made it clear that it likely won't be the last acquisition that the cannabis company takes on.
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Another acquisition coming soon?
On March 31, Sundial announced the closing of its acquisition of Alcanna. The deal will not only give the company a presence in liquor retail, but it will also benefit from the growth in pot retailer Nova Cannabis, which is a majority-owned subsidiary of Alcanna's. It complements a deal that Sundial closed on last year to buy Inner Spirit, which at the time already had more than 100 pot shops across Canada.
But there's no indication that Sundial is done. On its latest earnings call, CEO Zach George said: "Don't think that the Alcanna transaction is necessarily the last acquisition that Sundial engages in." Earlier, George noted that potential acquirors should "welcome" a decline in stock prices. Although this doesn't mean a transaction is imminent, it does suggest that the CEO is looking at declining valuations and potentially eyeing some potential targets.
Sundial is plump with cash
A big reason why Sundial can afford to look at acquisition is that as of the end of March, the company reported having $1 billion Canadian dollars in cash, securities, and investments. At the same time, it also has no debt on its books. The only encumbrance on the business would be its need to fund day-to-day operating activities. And for the three-month period ending March 31, Sundial burned through just CA$26 million. That would put it at a run rate of a little more than CA$100 million. The one caveat is how that number might change once it includes Alcanna and as Sundial continues to integrate and grow the new businesses it has acquired.
But the company doesn't need a full CA$1 billion to make a big investment. Some of the larger players in the cannabis industry trade at modest valuations; OrganiGram Holdings has a market cap of less than CA$500 million, while Aurora Cannabis is at around CA$850 million. And a potential deal wouldn't have to be funded primarily with cash. Sundial's acquisition of Alcanna was a combination of cash and stock.
Would another acquisition make Sundial a better buy?
Acquisitions have diversified Sundial in a big way. The company now has pot shops in its portfolio, and it has a liquor business. These are things that weren't there a few years ago. Sundial has gotten more diverse, and its operations are certainly bigger.
However, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) falling into the negative last quarter (the company reported positive adjusted EBITDA of CA$3.3 million in the prior-year period), it's debatable just how much better a position Sundial is in with these acquisitions.
The short answer is that it's too early to tell. And that's why it would be equally difficult to predict if the company will be in better shape after another acquisition. It's not clear if the company would expand on its retail businesses or acquire an entirely different one altogether. That uncertainty, combined with Sundial's penchant for dilution, are sufficient enough reasons to avoid the stock right now.
Year to date, the stock is down 30%, which is slightly better than the 35% decline the Horizons Marijuana Life Sciences ETF has been on. But if Sundial can't show investors that its acquisitions are paying off in a big way, there could be more of a drop in the share price before the year is over.
