Sundial Growers (SNDL 2.87%) is still in deal-making mode. In the past year, it has closed on multiple transactions, with the most recent being liquor retailer Alcanna. Despite the cannabis company's troubles on Wall Street -- its shares are down 87% since 2020 -- it remains focused on growing its business and diversifying it.
One company that it has a history with, Zenabis, recently filed for protection from creditors, and the ever-opportunistic management team at Sundial is looking at scooping up the assets of its struggling cannabis peer.
Sundial announces plans to acquire Zenabis' assets
On June 20, Sundial issued a press release stating that it had entered into a bid agreement to potentially acquire the assets of Zenabis including its shares. Zenabis produces medical and recreational marijuana and has multiple facilities across Canada, with a cultivation capacity of more than 110,000 kg. One asset that Sundial is particularly keen on is a 380,000-square-foot growing facility in the Canadian province of New Brunswick. It's of key importance because it has good manufacturing practice (GMP) certification from the European Union, so ownership of the site could allow Sundial to export products to the EU and the U.K.
It looks as though Sundial is focusing on the impact of what this could do for its business internationally. In the press release, it notes that in its fiscal second quarter, which ended Jan. 31, Hexo (which owns Zenabis) generated quarter-over-quarter sales growth of 36% internationally. However, in the following quarter, Hexo's net sales declined by 14%, and it cited underwhelming international sales as a key reason for the slump. (It released those fiscal Q3 2022 results on June 14.)
Zenabis and Sundial have a history
Sundial's pursuit of Zenabis goes back to the end of 2020 when it announced it had acquired $58.9 million worth of its senior debt. There was a dispute over whether Zenabis had made a payment on that debt in time and whether or not it was in default. Zenabis management expressed suspicion about the motives behind the debt purchase, saying "Sundial made such investment in an attempt to coerce Zenabis into being acquired by Sundial."
Hexo eventually came to the rescue of Zenabis, acquiring it for 235 million Canadian dollars in February 2021. Today, Hexo has a market cap of around CA$150 million, reflecting how significantly valuations in the cannabis industry have come crashing down over the past year.
Is this a good move for Sundial?
Acquiring Zenabis' assets could be advantageous for Sundial Growers, depending on how much it ends up paying for them. But given how heavily the markets have tanked, they may not cost Sundial a whole lot. The Horizons Marijuana Life Sciences ETF has declined by 64% over the past 12 months. If Zenabis is worth roughly a third of what Hexo paid for it last year, that would put its value today at around CA$80 million. Sundial had CA$1 billion in cash, marketable securities, and long-term investments on its books as of the end of March.
However, there's also the cost of managing these assets that investors shouldn't overlook. While acquiring them could open up more opportunities for Sundial Growers in Europe, that doesn't mean they will translate into improved profitability or even growth. If Zenabis' business was all that promising, one might expect that Hexo would make more of an effort to help keep its subsidiary afloat rather than to see its assets potentially go to a rival.
Investors shouldn't rush to buy Sundial Growers' stock
Sundial Growers' recent acquisitions have expanded its operations -- they now include pot shops and liquor stores. If this deal is successful, the company could also begin generating sales from international cannabis markets. With so many moving pieces, it can be difficult for investors to gauge whether that would truly put the company in a better position or if it would just add complexity and potentially even make it a worse investment in the end.
I'm not sold on the idea of the company buying more assets in an already-saturated Canadian cannabis market. Although they may generate some incremental growth for Sundial, the company would likely be better off investing in its own operations to make them more efficient and profitable. Its net losses over the trailing 12 months totaled CA$134 million.
Given the volatility in the markets these days, especially in the cannabis sector, investors would be better off taking a wait-and-see approach with Sundial rather than jumping in and buying shares today.
