Canopy Growth to buy Supreme Cannabis in $435M deal

Cannabis giant Canopy Growth (WEED.TO)(CGC) has announced a deal to acquire smaller Canadian pot producer The Supreme Cannabis Company (FIRE.TO) in a bid to boost its appeal with non-medical consumers.

David Klein, the chief executive officer (CEO) of Smiths Falls, Ont.-based Canopy, said the deal is aimed at eliminating "white space" in the company's pot product portfolio, specifically in higher-end cannabis.

After emerging as an early leader in the Canadian recreational pot market, Canopy has seen its share of non-medical sales fall as its competitors gained strength. The company hopes to regain ground with the acquisition of Toronto-based Supreme's 7ACRES premium pot brand.

"We want it to strengthen our position in premium flour. 7ACRES fits that bill, being the number one premium flower brand in Canada," Klein told Yahoo Finance Canada in an interview on Thursday.

The transaction is valued at approximately $435 million on a fully diluted basis. Under the terms, Supreme Cannabis shareholders will receive 0.01165872 of a Canopy common share, and $0.0001 in cash in exchange for each Supreme Cannabis share held. Canopy said that's a roughly 66 per cent premium based on Monday's closing prices for both companies' shares on the Toronto Stock Exchange.

The deal is expected to close in June 2021.

The announcement comes on the heels of Canopy's deal to acquire the owners of Ace Valley, an Ontario-based white-label maker of pre-rolled joints, vapes and edibles. Financial terms of that deal were not disclosed.

Klein described the deals with Supreme and Ace Valley as "tuck-in" acquisitions aimed at shoring up Canopy's cannabis offerings in Canada ahead of more investment in the United States.

"We think it's all part of the same focused, cohesive strategy," he said. "We can bolt these on to our Canadian platform. They allow us continue to invest in knowing our consumer and innovation, which will ultimately help us when we go to the U.S. market."

Canopy said the acquisition of Supreme would result in $30 million in cost synergies in the two years after the tie-up closes. The deal would add Supreme's facility in Kincardine, Ont. to Canopy pot cultivation footprint, which the company has aggressively shrunk over the past year through plant closures.

Klein said he expects the Kincardine facility to remain a long-term part of Canopy's operations.

On a pro-forma basis, the company is expected to have a 13.6 per cent share of the overall Canadian recreational cannabis market. It is also expected to command a 23.3 per share of the premium cannabis flower market in Ontario, and a 21.4 per stake of that segment in B.C.

Last month, Canopy announced it borrowed US$750 million from private equity group King Street Capital Management. The move heightened expectation that deals were on the horizon. On Thursday, Canopy said it expects to have about $2.5 billion in cash on its balance sheet after the deal to buy Supreme to fund further expansion and product development.

For Supreme shareholders, the deal with Canopy represents a pathway to the United States market, where the company is building out a CBD business ahead of potential federal pot legalization. Canopy's non-intoxicating CBD portfolio includes products developed in partnership with Martha Stewart, as well as BioSteel beverages and First & Free CBD oils, topicals and edibles.

"We have also built a highly sought-after premium brand in 7ACRES. Combining Supreme Cannabis with Canopy – a Canadian market leader with exposure to the United States – presents a significant value creation opportunity for both companies," Beena Goldenberg, president and CEO of Supreme Cannabis, added in the release.

The Canadian cannabis sector has seen noteworthy consolidations in recent months. In December, Aphria (APHA.TO)(APHA) and Tilray (TLRY) agreed to join forces to become the largest cannabis company based on revenue. In February, HEXO (HEXO.TO)(HEXO) announced a $235 million all-stock deal to acquire rival Canadian cannabis producer Zenabis (ZENA.TO).

"People are picking their partners. That's really what we are seeing in Canada. I think that's healthy," Klein said. "It's the natural sort of house cleaning that takes place in any space."

Canopy said the deal has been approved by its board and Supreme's board, which recommends that Supreme shareholders vote in favour of the transaction. The deal requires the approval of at least two-thirds of Supreme shareholders at a special meeting to be held in June.

Supreme shares surged 52.83 per cent to $0.40 on the Toronto Stock Exchange at 9:51 a.m. ET on Thursday. Toronto-listed Canopy shares fell 1.75 per cent to $37.16.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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