TORONTO - Canopy Growth Corp. continued its recent acquisition spree and preparation for the U.S.'s potential legalization of pot with a $435-million deal to buy the Supreme Cannabis Co. Inc. on Thursday.
Smiths Falls, Ont.-based Canopy said the acquisition will see Supreme Cannabis's 7Acres, Sugarleaf and Hi-way brands join Canopy's roster, that already includes Tweed, Tokyo Smoke, Quatreau and Doja.
"Our supply is in balance with our demand, so we just view this as a win on the brand side and a win from a production asset side," Canopy chief executive David Klein said in an interview.
"It also bolsters our path to profitability in Canada, which then positions us to hold that strong set of financial statements for our entry into the U.S. market."
The deal is Canopy's latest acquisition in a wave of consolidation in the cannabis sector, while it watches to see whether the U.S. loosens laws around marijuana following the election of President Joe Biden.
Canopy announced last week it had bought Ace Valley, a Toronto company that makes vapes, gummies and pre-rolls in a bid to attract Gen Z and millennials.
Klein believes Toronto-based Supreme will help Canopy corner a higher-end market with its flowers, pre-rolls, vapes and edibles.
"I think of this as a bit of a tuck-in acquisition where there's whitespace in our portfolio particular on the premium end," Klein said.
Canopy predicts the deal will result in about $30 million in cost synergies over the next two years and further value will be derived from Supreme's Kincardine, Ont., production facility, which has a record of producing premium flower at low costs.
Beena Goldenberg, Supreme's chief executive, said the companies are a good match because together they'll have 13.6 per cent of the Canadian recreational market and 20 per cent of the premium market in Ontario and British Columbia."Why the premium segment is so important is obviously the higher margin means more consumer loyalty, they're not brand-switching, and they're coming back based on the quality," she said.
While Supreme wasn't in talks with other buyers, she said Canopy was attractive because of the importance it applies to research and development and its lofty U.S. goals.
Canopy has been eyeing the U.S. market ever since Biden's election.
Biden supports decriminalizing pot, expunging criminal records related to its possession and the Safe Banking Act, a Democratic bill that would allow financial institutions to work with cannabis companies without retribution.
The act was reintroduced to the U.S. House of Representatives in early March.
Ahead of Biden's inauguration, the House paved the way for federal cannabis legalization by voting in favour of taking the substance off the dangerous drugs list, but Senate and White House approvals are needed for the policy to be implemented.
Canopy spent some of March preparing for that day. It announced early in the month that it would launch four sparkling cannabidiol waters under its Quatreau brand.
"This is a bit about how do we strengthen ourselves in our home market, so that we can be prepared to really make our mark in the U.S. when we can," Klein said Thursday about Canopy's recent moves.
The Supreme deal is not expected to close until June, but the transaction has the support of Canopy and Supreme's board of directors.
Asked if she would remain with Supreme and move to Canopy after the transaction, Goldenberg said. "we're getting a little ahead of ourselves and we have two months and we need to get to our shareholder votes."
Under the deal, Supreme Cannabis shareholders will receive 0.01165872 of a Canopy common share and 0.01 of a cent in cash for each Supreme Cannabis share held.
The offer is worth 44 cents per Supreme Cannabis share.
Supreme Cannabis shares closed at 40 cents after surging 49.1 per cent or 13 cents on the Toronto Stock Exchange, while Canopy shares lost $1.99 or 5.27 per cent and closed at $35.75.
This report by The Canadian Press was first published April 8, 2021.
Companies in this story: (TSX:WEED, TSX:FIRE)