Canopy builds on global plans with Mettrum takeover
Canadian medical marijuana producer Canopy Growth Corp.’s $430 million deal to buy Mettrum Health Corp. marks the biggest takeover to date for the burgeoning global marijuana sector, if completed as planned.
The all-stock friendly deal announced Thursday would see Canopy add two brands to its portfolio, increase its production capacity to 665,000 square feet and give it a post-acquisition cash balance of $68 million, positioning it for further growth ahead of the Canadian government’s plans to table legislation making marijuana legal in the spring.
“I think if you believe the sector’s going to happen and you believe it’s going to happen meaningfully before the next election, you need to be moving now, not talking about moving,” Canopy CEO Bruce Linton said of the company’s ambitious growth plans, which involve positioning for both medical and recreational markets in Canada and internationally.
Mettrum shareholders will receive 0.71 shares — worth $8.42 based on Canopy’s closing price Wednesday — for every Mettrum share — about 42 per cent higher than its closing price of $5.92 on the TSX Venture Exchange. Mettrum shares rose 28 per cent in Toronto trading Thursday to close at $7.60, while Canopy shares closed down four per cent at $11.35.
Both Canopy and Mettrum shareholders will vote on the deal at special meetings to be held in January. Finalization of the deal came hours after the country’s Task Force on Marijuana Legalization and Regulation delivered its eagerly-awaited report to cabinet on how the government should proceed to end centuries of prohibition. The findings are expected to made public later this month.
If legalization proceeds smoothly and a functioning market exists by 2018, as anticipated, the recreational marijuana industry could be worth $6 billion by 2021, according to a report released earlier this week by Canaccord Genuity.
The deal also furthers Canopy’s global ambitions: Mettrum has an export agreement in Australia, which combined with Canopy’s purchase of German medical marijuana distributor MedCann earlier this week and a pre-existing partnership in Brazil means the combined company would have a foothold on three continents.
In an unrelated release, Torontobased Mettrum announced that it was voluntarily adding to the number of product lots it will recall following a Health Canada visit that found plants were exposed to an unapproved insecticide.
Analysts said Thursday that Mettrum was an attractive and logical acquisition target, given that it had been undervalued compared to its peers. In August, it secured $25 million in new financing, funds that could further boost Canopy’s coffers.
“The reason I liked Mettrum so much is their valuation was very low relative to their sales,” said Alan Brochstein, investment manager at Houston-based New Cannabis Ventures.
“They did a very good job building a unique product that was resonating well with doctors, so I think the reason it was cheap is they never discussed their recreational strategy so people were concerned they didn’t have a strategy.”
Mettrum’s Spectrum brand uses a colour spectrum to indicate potency levels of different strains rather than “street names.” Mettrum said some 2,200 doctors have prescribed their product to patients.
Canopy’s move to purchase another large player like Mettrum made sense, given that Canopy’s market capitalization has skyrocketed past $1 billion in recent weeks, said Khurram Malik, head of research at Jacob Capital Management.
“Mettrum isn’t going to get any cheaper than it is today, while Canopy stock is pretty valuable so it’s not that painful to pull the trigger on an all-stock acquisition — and it’s a strong value play compared to the peers.”
Still, he added, Smiths Falls, Ont.-based Canopy’s decision to purchase another Ontario producer rather than focus on geographical diversity, “seems a little weird.”
“The thinking at least is when recreational goes live you want to be in a couple of different provinces, so one would have assumed they would have bought something in another province.”
Linton and Michael Haines, CEO of Met tr um, have known each other since the early days of the nascent industry and had talked loosely about merging several times. But the basics of this deal came together after Canopy approached Mettrum in mid-October, Haines said in an interview.
“We both had matured to a level where we didn’t think there was a lot that wasn’t factored into our companies,” he said. “The timing was right.”