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Valens shareholders should take the deal, says Haywood

Valens

A deal is in the works for Canadian cannabis business The Valens Company (The Valens Company Stock Quote, Charts, News, Analysts, Financials TSX:VLNS), and Haywood Capital Markets analyst Neal Gilmer thinks it’s a good one. Gilmer reviewed the acquisition offer from SNDL Inc (SNDL Inc Stock Quote, Charts, News, Analysts, Financials NASDAQ:SNDL) in a client update on Tuesday where he advised Valens shareholders to vote in favour of the acquisition, saying the combined company would rank in the Top 10 in terms of market share in the Canadian pot industry.

Valens and SNDL made the joint announcement on Monday, with SNDL proposing to acquire Valens in an all-stock transaction which would see Valens shareholders receiving 0.3334 SNDL shares for each Valens share, implying a $1.26 per share value to Valens shares and a total consideration of $138 million. The offer represents a ten per cent premium to Valens’ 30-day VWAP and Valens shareholders would own about 9.5 per cent of the combined entity.

Kelowna, BC-based Valens is a cannabis product manufacturing company with a number of extraction and processing and product development agreements with Canadian LPs and CPG companies. The company also makes and sells a set of CBD products in the United States under the Green Roads brand and distributes medical cannabis products in Australia through a subsidiary.

Meanwhile, Calgary-based SNDL (formerly Sundial Growers) is both a cannabis and liquor retailer in Canada with stores under retail banners including Ace Liquor, Wine and Beyond, Liquor Depot, Value Buds and Spiritleaf. The company is also a cannabis producer with indoor grow facilities and wholesale and retail customers. Sundial acquired Alcanna in March to enter the liquor business, adding over 170 stores to its stable and creating the largest private sector liquor and cannabis retailer in the country. 

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Valens currently has a market capitalization of $84 million, while SNDL’s market cap is about $460 million. As of their most recently reported quarters, Valens had $24.0 million in revenue for its second quarter 2022, an adjusted EBITDA loss of $15.9 million and a 3.2 per cent share of the Canadian cannabis market, including a 10.9 per cent share of the cannabis beverage market. SNDL reported $223.7 million in revenue for its Q2 2022 and an adjusted EBITDA loss of $25.9 million. 

Commenting on the proposed acquisition, Valens CEO Tyler Robson said in a press release, “With SNDL’s exceptional balance sheet and largest cannabis retail network in Canada we look forward to taking Valens’ brands to new heights and unlocking 2.0 products for the SNDL platform. We believe the pro forma company provides investors with attractive exposure not only to the highest revenue generating cannabis company in Canada trading well under its tangible book value but also a dominant platform that can become a global leader in cannabis.”

Gilmer said the transaction will create one of the largest Canadian cannabis operators, with vertically integration operations and strong growth prospects. He said SNDL’s strong cash position would allow for the repayment of Valens’ debt while still giving the combined entity a healthy balance sheet at pro-forma about $314 million in net cash. Gilmer noted that the companies said joining forces would result in upwards of $15 million in additional annual run-rate EBITDA.

“Combining SNDL’s high-quality cannabis cultivation with Valens’ low-cost biomass procurement and manufacturing will allow for a wider range of innovative products to be developed. SNDL will be able to use the low-cost platform to enhance its own product lines and offer more pricing flexibility to its retail partners,” Gilmer wrote.

Prior to his new update, Gilmer had a rating of “Hold” on VLNS and a 12-month target price of $1.25 per share.

“We recommend shareholders to Tender to the acquisition offer with the all-stock transaction providing upside to Valens shareholders through SNDL Inc,” he said. “The implied offer is in line with our previous target price that we had recently lowered following a challenging few quarters and balance sheet [for Valens]. Despite the implied valuation at less than 1.0x next year’s revenue, we do not anticipate any other bidders in the current landscape.”

Valens has scheduled a Special Meeting & Shareholder Vote for November 2022, with an expected closing date of the transaction in January 2023.

Shares for both stocks haven’t gained any ground with the acquisition announcement, with SNDL currently down about four per cent since last Friday’s close and VLNS down about 11 per cent. Year-to-date, SNDL is down about 52 per cent and VLNS is down about 64 per cent.

About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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