David George-Cosh

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Canopy Growth Corp. is buying rival pot producer Supreme Cannabis Company Inc. for $435 million in a cash-and-stock deal aimed at bolstering its share of the Canadian recreational market.

The deal comes a few days after Canopy announced it had bought the parent company behind Ace Valley, a white-label cannabis company that sells pre-rolls, vapes, and edibles in the Canadian market. While that deal expanded the company's premium offerings in Canada, the deal for Supreme gives Canopy another leading national brand that has a reputation for high quality and consumer traction. 

Canopy said in a release it expects approximately $30 million in cost synergies over the next two years once the deal closes. The company also said the tie-up with Supreme will give it a 13.6-per-cent share of the Canadian cannabis market, including a top position in the premium dried flower and PAX vape categories. It will also acquire a small cannabis cultivation facility in Kincardine, Ont. as well as some smaller medical and recreational brands. 

Canopy will pay Supreme shareholders  0.01165872 of a common share and $0.0001 in cash for each share, the company said. The offer represents a 66-per-cent premium to Supreme's share price as of April 7.

Canopy Chief Executive Officer David Klein said in a phone interview the deal is more of a "tuck-in" acquisition for the company that helps address any missing parts in its brand portfolio.  

"We like the premium positioning of the product compared to other brands," he said. "We liked the fact [Supreme] was super focused and we weren't getting anything outside of what we wanted."  

While the deal isn't expected to be transformational to Canopy, it should help to address some weakness in its Canadian portfolio, Jefferies Analyst Owen Bennett said in a report on Thursday. 

"The Supreme brands, which are targeted at specific segments, should strengthen Canopy's portfolio," Bennett said. "Importantly, it also adds a strong premium brand to its offerings. Premium brands comes with greater brand loyalty and pricing power over the longer term."

Canopy announced it borrowed US$750 million from private equity group King Street Capital Management LP in March, a deal that fuelled analyst speculation that it would be on the hunt for a potential acquisition.

Consolidation in the Canadian cannabis sector is widely expected to ramp up this year as producers struggle in a highly competitive market that is marred by a flood of unsaleable legal pot and concerns over quality. Deal activity kicked off in December following Aphria Inc.'s merger announcement with rival Tilray Inc., a move aimed at helping propel the two companies into a leading market position while cutting about $100 million in costs. Other notable deals include Hexo Corp.'s February acquisition of Zenabis Global Inc. for $235 million.

Klein said he expects more consolidation to take place in the Canadian market, but plans to invest the bulk of the company's available capital in the U.S. cannabis sector, once it is federally permissible to do so. While the U.S. government hasn't specified when it will legalize cannabis federally, three states including New York formalized their recreational pot plans over the past month. U.S. Senate Majority Leader Chuck Schumer said he plans to unveil a marijuana reform bill sometime soon. 

"Adding these two companies fills most of the gaps that we would see in our portfolio. The rest of our capital and our investment dollars; you're going to see go into insights and innovation and brand building and preparing for entry into the U.S.," Klein said.