Consolidation in the cannabis industry is inevitable. Many businesses are struggling to grow, and pooling resources together can be the best way to increase market share and generate efficiencies.
Two cannabis companies that I can definitely see crossing paths in the near future are SNDL (SNDL) and Tilray Brands (TLRY). Both companies are fighting for market share, and that could intensify in the future, especially as they continue to pursue acquisitions. Another scenario that could happen is that they end up joining forces.
Why Tilray might need SNDL
Tilray is likely to go on acquisition spree, simply because it has an aggressive sales target of $4 billion that it set for itself for 2024. That's just not a scenario I see happening organically for a company that, over the trailing 12 months, reported just $628 million in revenue.
It needs to grow its market share however it can. With SNDL acquiring many business of late and getting bigger, it may fill an important need for Tilray.
Last month, SNDL announced that it was acquiring cannabis-extraction business Valens in an all-stock deal worth 138 million Canadian dollars. SNDL claims that the deal would mean it has, "the highest pro forma Canadian cannabis revenue on a last fiscal quarter annualized basis." For the period ending June 30, SNDL's revenue totaled CA$223.7 million, putting it at an annual run rate of nearly CA$900 million ($693 million).
Plus, SNDL acquired liquor-store operator Alcanna in March. Alcanna is the largest private-sector retailer in Canada (based on store count).
Tilray has shown an interest in acquiring ancillary businesses to expand beyond just cannabis. Last year, it acquired Colorado-based Breckenridge Distillery, which Tilray hopes will one day help it produce cannabis-infused whiskey.
Why a merger could make sense for SNDL, as well
For SNDL, the company may benefit from being a part of a business with better financials. In July, Tilray reported its quarterly results for the period ending May 31. It marked the 13th-straight quarter of positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).
SNDL, meanwhile, posted an adjusted EBITDA loss of $25.9 million in its most recent period. SNDL's financials aren't as strong as Tilray's, and joining forces with Tilray could be a way to ensure that SNDL has the resources it needs to keep investing in growth opportunities.
Investors also shouldn't forget it wasn't all that long ago that SNDL was looking at potentially selling its business. In August 2020, the company announced that it had recently initiated a process to review strategic alternatives, which included the potential sale of the company. Things may have played out differently had SNDL not become a red-hot meme stock in early 2021, jumping to a value of nearly $4 per share (the equivalent of around $40 today when factoring in its recent reverse stock split).
The company made multiple offerings around that time to cash in on its rising share price. And since then, management has appeared to have much more confidence in the business and has been pursuing acquisitions.
However, now the hype has died down, and SNDL is struggling like many other pot stocks -- it's down 63% over the past 12 months, which is actually better than the 73% decline in Tilray's stock over that time frame. It's also fresh off a reverse stock split. Yet the future is becoming a more daunting and challenging task for management. Therefore, it could make sense for the company to revisit the possible sale of the business or a merger.
Who would be the big winners if a merger happened?
Generally, shares of the acquirer decline in an acquisition, while the company being acquired benefits from a jump in the share price. Tilray would be the likely acquirer, and SNDL investors in that case could profit from Tilray paying a premium for the stock, if a deal were to happen.
That being said, investors who own either Tilray or SNDL could still end up with losses in the long run. Tilray's stock could conceivably decline as investors may be discouraged at the idea of picking up a risky meme stock. And over the long term, the company will have a tough job to do as it integrates SNDL and other acquisitions into its operations. As noted earlier, Tilray may need even more deals for the sake of hitting its target of $4 billion in revenue.
SNDL investors could also incur losses because the bump up in share price would be relative -- it would depend on when the acquisition takes place. Shares of SNDL could fall lower, and even if someone acquired the company for a premium, it may not necessarily be enough to recoup the losses that investors have incurred up until that point.
The key takeaway here is that even if there's a merger or acquisition that takes place involving these two companies, that doesn't mean investors of either stock will profit from it. And it certainly doesn't mean that it's worth buying either stock right now. There's still plenty of risk here, and even if these two cannabis companies come together, the resulting entity may still not be worth adding to your portfolio.
