Consolidation in the cannabis industry is inevitable. Companies are struggling right now, burning through cash amid mounting losses. It may only be a matter of time before investors start to see some deals take place involving major players in the industry. There are already reports of one potential blockbuster that could be in the works that investors should watch out for.
Could Curaleaf acquire Cronos?
According to Reuters, Cronos Group (CRON 3.60%) is looking to sell and is in talks with possible buyers. One of the companies reportedly involved is multistate marijuana operator (MSO) Curaleaf Holdings (CURLF 5.26%). Cronos says it is in the "initial stages" of exploring these possibilities, while Curaleaf has stated that its policy is not to comment on speculation.
Although both parties are pretty quiet on the matter, here's why it may be in the best interests of both businesses.
Why the deal would make sense for Cronos
Cronos has long been interested in expanding into the U.S. market. In 2021, it announced that its hemp-derived cannabidiol products would be available at hundreds of Ulta Beauty locations. And even though the bulk of its business is in Canada, Cronos still classifies that as part of its "Rest of World" segment, while the U.S. market, which contributed just 3% of the company's total revenue for the first three months of this year, is its main segment.
The cannabis company has incurred net losses totaling $168.7 million over the trailing 12 months, and it has burned through $88.9 million over that time frame just from its day-to-day operating activities. Cronos' growth rate has stalled, and with poor financials, there's little reason for investors to be bullish on its future. A sale could alleviate these problems while giving investors a more favorable outlook on the combined entity in the long run.
The one casualty of a deal with Curaleaf would be the combined entity may not be able to trade on the Nasdaq (where Cronos' stock is listed) as the exchange has previously objected to rival Canopy Growth looking to consolidate its U.S.-based businesses into its financials due to the federal ban on pot.
Why it would make sense for Curaleaf
Curaleaf investors may find it puzzling why a top MSO would want to buy Cronos, which has generated less than $92 million in sales over the trailing 12 months; Curaleaf makes nearly four times that in a single quarter.
But there are a couple of reasons Curaleaf may want to consider adding Cronos. The first is that thanks to a $1.8 billion investment from tobacco company Altria back in 2019, Cronos has plenty of cash on its books. As of the end of March, it had over $836 million in cash and short-term investments. For a company such as Curaleaf, which is shutting down operations in multiple states to improve its financial position, acquiring Cronos could be an easy way to bolster its balance sheet, especially if it's through an all-stock deal.
Another reason there's value here is that Cronos has been working with cell-programming company Ginkgo Bioworks on developing cultured cannabinoids. Creating cannabis products in a lab can drastically improve Curaleaf's cost structure and strengthen its bottom line.
If Curaleaf is interested in buying Cronos, I doubt it's because it wants to enter a highly competitive Canadian pot market where its problems could multiply. Instead, it's probably the cash Cronos has and the intellectual property it possesses that make it worthwhile to consider a deal.
Should you buy shares of Curaleaf or Cronos?
Cronos' stock has already spiked on speculation of a potential deal, but the risk is that even if a deal does take place, that doesn't necessarily mean it will be for a higher price. Investors who buy the stock could still end up losing if a transaction nets a lower price. That's why buying the stock simply on the hopes of an acquisition could be a risky move for investors.
In a similar sense, investors shouldn't buy Curaleaf due to speculation of as deal with Cronos, either. The company hasn't confirmed its interest in Cronos and again, it could come at a high cost and potentially prove to be dilutive to shareholders if it involves stock. Curaleaf may be a good buy based on its own merits and the long-term growth opportunities it may possess as more states legalize marijuana, but I wouldn't buy the stock because of a possible acquisition of Cronos.
