Expect a sector-wide lift after Canopy Growth Mettrum deal, says M Partners

The acquisition of Mettrum Health (Mettrum Health Stock Quote, Chart, News: TSXV:MT) by Canopy Growth Corp. (Canopy Growth Corp. Stock Quote, Chart, News: TSX:CGC) shows there may yet be another level to the already stratospheric rise of Canada’s marijuana sector, says M Partners analyst mason Brown.

Late Wednesday, Canopy announced it would acquire peer Mettrum in a deal valued at approximately C$430 million.

“From day one, Canopy Growth has viewed production capacity, brand diversity, and highly-skilled management as the foundational aspects of our business,” said Canopy CEO Bruce Linton. “Mettrum has established a line of cannabis products that work well in a medical context and will transition naturally into a natural and healthy lifestyle market. Their substantial production facilities will add to our growing production platform as we expand to meet the needs of patients, and their experienced personnel will help Canopy Growth drive our vision forward to the next level. Both Canopy Growth and Mettrum have proven themselves with Canadian patients; and together we intend to make our industry-leading product and service offering even stronger, while developing our common hemp objectives.”

Brown says the acquisition is a signal that the party in Canada’s marijuana sector might not be over yet.

“We expect a lift across the sector as Canopy displays that there is still long-term value within the sector despite the run-up in prices over the past few months,” says Brown. “…we highlight how we look at the industry from a long-term perspective and believe that there is still material upside for all players in the space.”

Brown say the deal scales Canopy considerably, giving the LP a more than 40% market share of patients on a pro forma basis.

“The acquisition expands Canopy’s portfolio of cannabis and hemp brands, is expected to realize revenue and cost synergies, and adds ~$27mm in net cash to Canopy’s balance sheet, leaving the company well-funded for expansion on a local and global scale,” says the analyst. “Recall, Canopy Growth acquired a majority ownership position in Groupe Hemp. Integrating Mettrum Originals is expected to solidify Canopy’s position in the hemp market, a valuable play as the hemp market provides marketing and advertising opportunities by getting on the shelves of grocery stores and furthering brand recognition. Canopy expects revenue and cost synergies to occur via cross-selling to customers, given a broader product offering, and improved supply chain management. Before exercise of options and warrants, the acquisition brings Canopy’s cash balance to ~$68mm and positions the company to continue its expansion plans.”

In a research update to clients today, Brown placed his rating and target on Canopy Growth Corp. under review.