SNDL (SNDL 2.34%) has been active when it comes to mergers and acquisitions over the past few years. The Canadian cannabis producer has been adding pot shops to its portfolio, and it has even expanded into alcohol. This month, it announced it would be acquiring Zenabis, a cannabis company that filed for creditor protection earlier this year and was previously part of Hexo.
While financial terms were not disclosed, it's likely that SNDL got a deal for the struggling company's assets. Here's a closer look at the deal and why it may or may not pay off for SNDL.
Why management likes the deal
Key to the deal is an indoor growing facility that SNDL will acquire, which CEO Zach George says has "considerable capabilities and proven outcomes, significant monetizable cannabis inventory, and valuable non-core real estate assets." The facility, which is based in New Brunswick, will add to SNDL's growing capacity and has obtained European Union Good Manufacturing Practices (EU GMP) certification, which allows it to ship products to Europe.
SNDL made its first international shipment of dried cannabis just a few months ago, in August, and this could play a key part in its strategy to grow internationally. SNDL will also acquire an industrial facility in Nova Scotia, but the company is looking to sell that property.
Why this move could be a positive for SNDL
By being able to ship more products out to Europe and international markets, SNDL has the opportunity to further diversify its business and become less reliant on a highly competitive Canadian cannabis market. Europe is the second-largest market for cannabis outside of North America and could be a significant growth opportunity for SNDL in the long run.
Analysts from Fortune Business Insights project that globally, the cannabis market will grow at a compound annual growth rate of 32% until 2028, with Europe playing a key part in that growth. Germany is looking to legalize marijuana, and if it does, it will become the largest country on the continent to do so.
Could the costs outweigh the benefits?
On the surface, the deal sounds promising for SNDL to lock up the assets of Zenabis and pave the way for more growth. But investors shouldn't forget that Zenabis isn't exactly a coveted business and was in creditor protection because it was struggling. Its operations may not have been all that efficient or profitable. And while the international cannabis markets are full of opportunities, they will take time to grow, and this transaction won't necessarily result in a quick boost to SNDL's top line.
For a company like SNDL that is trying to become profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, this could cause more headaches than it's worth. During the period that ended June 30, the company posted an adjusted EBITDA loss of CA$25.9 million, which deepened from a year ago despite SNDL acquiring alcohol retailer Alcanna and its top line jumping by a massive 2,344%.
Acquisitions don't always pay off, and by focusing resources on another segment and selling internationally, SNDL may be unnecessarily complicating an already complex business that needs a lot of work to become profitable and win back investors; year to date, shares of SNDL are down 60%.
Is SNDL a buy on this news?
SNDL's business can get broader and more diverse with the acquisition of Zenabis' assets, but whether it will pay off for the company is questionable. Simplifying its operations would have been a safer approach to take, and that's what many companies in the industry have been doing in an effort to cut costs in the hopes of becoming profitable.
In SNDL's case, the company looks to be doing the opposite by getting bigger and perhaps more bloated with expenses. My preference would have been to see the company look at expanding internationally after it has its house in order and its current businesses are doing well. There's no rush to get into an international cannabis market that's still in its very early growth stages.
For those reasons, SNDL doesn't look to have become a better buy on this news, and investors should remain wary of what is a high-risk cannabis stock to own.
