Which Cannabis companies are most likely to be acquired?
Question: I read with interest your listing of beverage, tobacco and pharmaceutical companies that may eventually be looking for cannabis companies to invest in. There seems to be a lot more suitors than there are potential candidates which may be why the activity is starting earlier than we thought.
Can you list in order of probability those companies that may be acquired whether they be in Canada or the US? Obviously Canopy has been and Aurora and Aphria are at the top of the list maybe in that order. But in order of probability who do you think are the next 10 or so?
Are there candidates that are more suitable to a beverage, tobacco or pharmaceutical company?
Will you start investing in these companies in your model portfolio?
Derby Dude from Macungie, PA, USA
Answer: I’m afraid your question is much better than my answer is going to be. I will address your queries in reverse order.
First, I don’t think it is prudent to invest in a company because you think it will be taken over. Only a very small percentage of companies are ever acquired which means the odds are against success. I think it is best to invest in companies that you believe have outstanding growth prospects that you can buy at reasonable prices. If there is a chance they will be acquired that should be just one of many reasons you own it.
In terms of The Cannabis Report Model Portfolio, as I look at the list, many of them have the prospect of them being taken over was a consideration in adding it to the portfolio. For example:
Khiron Life Sciences (TSXV: KHRN): with a market cap of around $50 million, KHRN is an excellent way for a cannabis company to get into the Latin American medical cannabis industry.
Lexaria (CSE: LXX): has a technology that appeals to anyone that wants to deliver CBD, THC, or nicotine, among others by consuming it. The potential for interest from many companies in many industries is significant.
Organigram (TSXV: OGI): is one of the names that always comes up in recent discussions about Licensed Producers that are potential takeover targets.
Sunniva (CSE: SNN): offers an acquirer a leading grow position in California as a base to launch an expansion program in the U.S.
Obviously, in this portfolio takeover potential is a consistent theme. But each company is owned for the return potential based on fundamentals and an acquisition bid is simply the cherry on the top.
Finally, my top ten picks with the odds of their being taken over. This, I am afraid, is an impossible request. What I will try to do is outline the characteristics to look for in possible takeover targets.
Most important is a target must not contravene any laws, especially U.S. federal laws. We have seen many companies change their business models by selling off U.S. assets to comply with the Toronto Stock Exchange listing requirements in this regard. Of the companies I follow, Lexaria, Namaste and Sunniva would fall in this category: Lexaria is setting up subsidiaries to own various Intellectual Properties, Namaste sold its U.S. operations and Sunniva is in the process of separating its U.S. and Canadian assets into separate companies.
In this case, size matters. But it isn’t necessarily only financial size that matters although it is important. It is no surprise that Canopy, Canada’s largest and perhaps the world’s largest cannabis company at the time was the first target and names like Aphria and Aurora are seen as likely targets. I think acquirers will also consider the size of the opportunity and that may lead them to consider a company like Lexaria with their DehydraTECHTM technology.
As I gain experience in the cannabis industry, I am less convinced that growing cannabis is important. I believe cannabis will rapidly become commoditized, that is, bought and sold like any agricultural crop. As this happens, being a low cost producer becomes very important. In the case of cannabis, that is why I like Khiron Life Sciences (TSXV: KHRN). KHRN should be able to produce cannabis at costs that simply cannot be matched in North America. So Canadian and U.S. growers will have to brand and market their products to justify higher prices that will cover their higher costs.
In the end, I wonder if growing will be of much value at all. Philip Morris (NYSE: PM), for example, sources tobacco from growers and suppliers in thirty countries around the world and they require their suppliers to follow PM’s own Good Agricultural Practices program. In the world of tobacco, growers are closer to the bottom of the food chain. In wine, however, growing ranks much higher as companies brand and market their wines grown from specific grapes in special regions. For example, in the European Union, ‘Champagne’ is governed under a treaty made in 1891. But as the popularity of wine expands internationally, many old standards no longer apply and wines are tending to become any alcoholic beverage made from grapes.
I hope some of these random thoughts will help you decide if your portfolio holds companies that might appeal to an acquisition minded company.