Canopy Growth’s acquisition of Hiku Brands is a good play, Canaccord Genuity says

Licensed cannabis producer Canopy Growth Corp’s (TSX:WEED, NYSE:CGC) just-announced agreement to acquire cannabis retailer Hiku Brands Company (CSE:HIKU) is an excellent move, says analyst Neil Maruoka of Canaccord Genuity, who contends that Hiku will give WEED a strong retail presence in Western Canada.

Yesterday, Canopy announced the all-stock deal, which will see Hiku shareholders receive 0.046 shares of WEED in exchange for each common share of Hiku, implying $1.91 per Hiku share, a 33 per cent premium. The deal must be approved by 66.7 per cent of Hiku shareholders at a meeting to be held next month.

Maruoka says the pickup will dovetail with Canopy’s growth strategy.

“We believe this is an excellent strategic acquisition for Canopy, bringing in a strong retail and brand company at a reasonable price (3 per cent of Canopy’s market cap),” says the analyst in an update to clients on Tuesday.

“The addition of Hiku brings an expected 21 retail locations by year-end, including a master license won in Manitoba,” says Maruoka. “Hiku is also in the running for additional cannabis retail licenses in Alberta and Newfoundland. We believe that Hiku’s retail focus is a complementary fit to Canopy’s rec strategy.”

The analyst has updates two assumptions to his valuation by increasing the share count and increasing Canopy’s expected recreational market share from 20 per cent to 23 per cent.

“While we continue to believe Canopy may well emerge as the industry leader once the rec market comes on line in Canada, we note that the company currently trades at 31.9x our two-year forward EBITDA forecast, at the high end of larger peers averaging 23.1x EV/EBITDA (2-year forward),” says Maruoka.

The analyst has upped his target price for WEED from $32.00 to $34.00 while maintaining his “Hold” rating. Maruoka’s new target represents a projected one-year return of negative 12 per cent return at the time of publication.