The Canadian government's decision to license over 1,000 cannabis producers, along with its inability to rein in black market operators, has been an unmitigated disaster for the country's top legal cultivators. Despite billions of dollars being spent on state-of-the-art cultivation facilities, brick-and-mortar retail outlets, and virtual storefronts, Canada's largest cannabis companies have been losing money at an alarming rate due to a vast oversupply of product in the country.
This oversupply problem has caused the prices of dry flower to plummet since the country first legalized recreational marijuana use among adults in October 2018. In turn, profit margins have cratered across the industry, spurring some notable cannabis companies like Aurora Cannabis (ACB -1.15%), SNDL, and Tilray Brands to diversify into non-cannabis businesses like alcohol and vegetables in an effort to become cash-flow-positive.
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What's more, Canopy Growth, the country's brightest star upon the initial onset of legalization, recently moved to an asset-light model by shuttering production facilities, sourcing product from third parties, and shrinking its commercial footprint in direct response to these headwinds. Canopy, in effect, has decided to pivot away from its home market due to this dire situation.
So, with the pressure mounting, Canadian cannabis executives think the industry is ripe for consolidation. And yesterday, Tilray CEO Irwin D. Simon stated as much on multiple occasions during the company's 2023 fiscal third-quarter earnings call.
Consolidation comes with the benefits of aligning supply and demand curves, finding cost-saving synergies, and increasing market share. Tilray, for its part, has already used this business development strategy to markedly increase its market share in Canada through the 2021 merger with Aphria, and then again with its latest acquisition of HEXO.
These two cultivators may the next targets
Against this backdrop, cannabis investors are probably curious about which companies are likely to be the next acquisition targets. Fortunately, the answer is fairly obvious. Aurora Cannabis and Organigram Holdings (OGI 1.07%) would both bring a lot to the table for a potential buyer.
Aurora has repositioned itself as a leading medical cannabis company in both Canada and internationally. Moreover, the company sports a fairly sizable international footprint with established operations in highly sought-after markets like Germany.
Even so, Aurora's shares have lost over 80% of their value in the past 12 months, causing the cannabis titan's shares to dip below the $1 minimum bid requirement for the Nasdaq Stock Market. Aurora, as a result, may have to either merge with a larger player like Tilray soon or execute yet another reverse split to remain on the Nasdaq. In 2020, Aurora performed a reverse split of its stock for the exact same reason. Shareholders, therefore, may welcome a different approach this time around.
Organigram is a craft cultivator with a lot to offer. The company sports one of the most efficient operations in Canada, a steadily growing market share in several important product categories, and a fairly strong balance sheet. Organigram's only real problem is that it has been weighed down by its less efficient peers.
Speaking to this point, the company's shares are currently trading below the $1 minimum bid requirement for the Nasdaq, thanks to the broad sell-off across Canadian marijuana stocks over the prior 12 months. As such, Organigram may also have to consider a reverse split at some point this year. Teaming up with Tilray or another top Canadian licensed producer may therefore be in the best interest of its stakeholders -- especially with cannabis stocks continuing to move lower in response to the threat of an upcoming recession later this year.
