David George-Cosh

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Canadian cannabis operator SNDL Inc. said Monday it will acquire rival producer The Valens Company Inc. in an all-stock deal, a move that will boost the combined companies' market share in the hypercompetitive and volatile marijuana industry.

SNDL, previously known as Sundial Growers, said Valens’ shareholders will receive 0.3334 of a common share of SNDL for each share that they own, with the implied value of the announced deal said to be worth $138 million based on SNDL’s closing price on Friday. Valens' shareholders will own approximately 9.5 per cent of the pro forma entity once the deal is closed.

The combined company is expected to generate $10 million in cost savings, while adding $15 million of earnings before interest, taxes, depreciation, and amortization on an annual run-rate basis through synergies and other strategic initiatives, the firm said in a statement.

SNDL previously owned 10 per cent of Valens through purchasing shares on the open market before Monday’s announcement.

"This powerful combination will result in the creation of a dominant vertically integrated company, exceptionally well-suited to weather the current cannabis environment and become a leader in the Canadian regulated products sector," said SNDL Chief Executive Officer Zach George in a statement.

SNDL’s deal follows several other transactions made in the Canadian cannabis market over the past year, as larger producers snap up smaller, unprofitable operators in an attempt to win more market share and generate enough cost savings to eventually achieve profitability.

SNDL also continues its acquisitive streak following recent purchases of liquor-and-cannabis retail operator Alcanna Inc. and retailer Inner Spirit Holdings Inc. that have propelled the company to become a dominating force in the Canadian pot retail segment. The company is leveraging its control of the 185 cannabis retailers it owns across the country to help fine tune what products it should focus on in the Canadian market, with a specific emphasis on large-volume premium cannabis products.

SNDL also operates an investment joint-venture called SunStream Bancorp Inc., which provides capital in the form of debt or credit to U.S. cannabis operators, a unique way for a Canadian company to invest in U.S. pot companies without erring on exchange regulations that forbid direct investing in those marijuana firms.

Much of SNDL’s recent rise in the Canadian cannabis space was fuelled by the recent meme-stock phenomenon that has seen thousands of retail investors, many of them taking cues from Reddit’s WallStreetBets forum, invest in a variety of companies such as AMC Entertainment Holdings Inc. and Bed Bath & Beyond Inc. As a result of SNDL emerging as a meme-stock darling, the company was able to raise nearly a billion dollars after issuing a billion shares issued between Feb. 2021 and Jun. 2021.

While SNDL’s deals have helped the company stave off bankruptcy in the early days of the pandemic and has led it to what industry consultancy Viridian Capital Advisors describes as “the best turnaround story we have witnessed in cannabis,” the company has yet to turn a profit, losing $47 million in its most recent quarter while generating $223.7 million in revenue.

ATB Capital Markets Analyst Frederico Gomes considers SNDL’s cultivation and processing segment as its most valuable business and said the company could increase its share of the Canadian market to 12 per cent by 2030, from the current 1.2 per cent, if it continues its consolidation plans. Gomes maintained an outperform rating (the equivalent of a buy) and lowered his 12-month price target to US$6 per share from US$8 in a report released on Aug. 19.

“We believe SNDL offers the best risk-reward opportunity in Canadian cannabis as both a contrarian and defensive play due to its diversification (exposure to cultivation, retail, and investments) and position as a consolidator in the space,” Gomes said.

However, Valens’ own financial prospects weren’t too promising after the company reported a $65 million net loss in its most recent quarter while generating $24 million in sales. The company was also running out of cash with just $26 million on its balance sheet. Valens did generate more revenue from its cannabis production business than SNDL did in the second quarter ($16.2 million versus $11.6 million), and is a top 10 player in the flower, vapes and beverages market segments, according to Hifyre, an industry sales tracker.