Will Canadian Cannabis Producer Aphria Join The M&A Bandwagon?

Ever since the Canadian government was in talks to legalize adult-use of marijuana, pot stocks in the country have been on the rise. In the quest to capture the soon-to-open recreational marijuana market, top Canadian cannabis companies have been expanding their production capabilities by acquiring smaller cannabis companies, in addition to investing capital organically. Consequently, the industry has witnessed a surge in the merger and acquisition (M&A) activity over the last few months. For instance, low-cost medical cannabis producer, Aphria, acquired Nuuvera and Broken Coast earlier this year in order to ramp its production capacity. In this note, we discuss how Aphria has grown inorganically and has the potential to broaden its operations further.

We currently have a price estimate of CAD 12.60 per share for Aphria using a 2019 P/E multiple of 35x. View our interactive dashboard – Aphria’s Price Estimate and modify the key drivers to create scenarios to suit your assumptions.

With the legalization of recreational marijuana, the Canadian cannabis market has witnessed a surge in the M&A activity over the last few months. Earlier this month, Constellation Brands (NYSE: STZ) announced its plans to invest about $4 billion into marijuana producer Canopy Growth Corporation (TSE: WEED) to get a head start in the cannabis-infused drinks market. Earlier this year, Aurora Cannabis (TSE: ACB) acquired Cannimed for $1.1 billion and MedReleaf (TSE: LEAF) for roughly CAD 3.2 billion ($2.5 billion) in an all-stock transaction.

Similar to its competitors, Aphria has been preparing itself to cater to the anticipated rise in demand for cannabis products post the legalization of adult-use of marijuana in Canada in October. For this, the company acquired Broken Coast Cannabis Inc., a leading premium cannabis producer based in British Columbia, for a sum of $230 million in cash and stock in January 2018. The deal is likely to add an annual production of 10,500 kilograms, increasing Aphria’s annual production capacity to 230,000 kgs. The transaction brings together Broken Coast’s premium cannabis output and proven brand name and Aphria’s low-cost and scaled greenhouse cannabis portfolio, which is likely to establish the latter as a premium indoor cannabis producer ahead of the legalization of recreational marijuana.

As the date for legalization of recreational marijuana approaches, we believe that the consolidation in the cannabis market is inevitable and is likely to pick up pace. As for Aphria, even though the company has been strengthening its distribution channels through joint ventures and partnerships with renowned companies such as Great North Distributors, (a subsidiary of Southern Glazer’s – North America’s largest wine and spirits distributor), we anticipate the company to acquire smaller companies in the sector in order to compete with its peers and stay ahead in the game. At the end of May, the company had a cash balance (net of debt) of $31.40 million. In addition, the company completed its bought deal in June of this year, raising around $258.75 million through the sale of its shares. Now, if we exclude the entire capital of $55 million that the company plans to invest in the expansion of its production facility, the company will still have a strong cash balance on its books to comfortably acquire a small to medium-sized cannabis company within or outside Canada. Some of the companies that could be a potential targets for acquisition by Aphria include Namaste Technologies, Golden Leaf Holdings, Organigram Inc., and Cannabix Technologies Inc.

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