Canopy Growth Corp’s Latest Acquisition is a Huge Stepping Stone

Canopy Growth Corporation (TSX:WEED) announced recently that it will acquire Germany-based cannabis manufacturer C3 Cannabinoid Compound, which should help to spur the Company’s European growth

John Brooker | May 6, 2019 | SmallCapPower: In an industry characterized by competition, bullish speculation, and rapid growth, cannabis companies making strategic acquisitions to give themselves an edge over their competitors is very common. Canopy Growth Corporation (TSX:WEED) (NYSE:CGC) did just this by acquiring Europe’s largest cannabinoid-based pharmaceuticals company,C3 Cannabinoid Compound Company. Recall that on April 18, 2019, Canopy Growth announced its plans to acquire Acreage Holdings Inc. (CSE:ACRG.U) at a 48% premium over Acreage’s closing share price on April 17, 2019, which was $22.49. Canopy Growth offered 0.5818 Canopy shares for each Acreage share pending the legalization of cannabis at the federal level in the United States, which equates to a value of $33.23 per Acreage share. In addition, Canopy will pay Acreage $2.55 per share as soon as Canopy and Acreage shareholders approve the deal, which amounts to a $300 million lump sum payment to Acreage Holdings.

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Canopy Growth Corporation, headquartered in Smiths Falls, Ontario, Canada, engages in the cultivation and sale of medical cannabis. On May 2, 2019, Canopy Growth announced that it will acquire C3 Cannabinoid Compound Company for €225.9 million ($342.9 million) in cash. In 2018, C3 posted $41.5 million in revenue for its cannabinoid products worldwide, which implies a takeout multiple of 8.3x.

With a global movement towards the legalization of marijuana, it can be a huge advantage for Canadian cannabis companies that want to be successful in the long run to geographically diversify their operations. C3 is a manufacturer and distributor of dronabinol, a chemical equivalent of THC. Dronabinol is a registered drug in Germany, Austria, Switzerland, and Denmark, and is prescribed for nausea and vomiting in oncology & palliative care. The drug has also been used to treat for both cancer pains & chronic pains.

This acquisition brings together Canopy Growth Corp’s medical marijuana business with Europe’s largest cannabinoid-based pharmaceuticals company. The deal gives Canopy immediate access to a wealth of knowledge and intellectual property developed by C3 in its nearly 20 years of research and development of natural and synthetic cannabis medical products. Adding dronabinol to Canopy’s product line in Europe gives their medical division, Spectrum Cannabis, the opportunity to present an expanded and credited array of cannabinoid therapies to the benefit of both healthcare professionals and patients. Canopy Growth will be able to use C3’s research programs to complement their own product development activities and will also be able to use C3’s established production, distribution, and marketing operations within Europe to their advantage, as they strive to establish their presence as a dominant global player in the cannabis market.

Due to the difficulty and varying methods in assessing the value of the intellectual property acquired as part of the transaction, analysts have differing opinions on whether the $342.9 million acquisition was a too high of a price for Canopy Growth to pay. Nonetheless, analysts agree that C3’s extensive experience as a cannabis producer will accelerate Canopy’s growth in European markets.

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As a company looking to position itself as a market leader in a rapidly-growing industry, Canopy Growth is expected to continue to make strategic investments and acquisitions that will help to facilitate growth, create competitive moats, and spur the development and approval of cannabis-based therapeutics to continue to better serve its patients worldwide.

As of the close on Friday, May 3, 2019, Canopy Growth Corp’s shares ended 0.5% lower at $65.71. Canopy Growth stock currently trades at a market cap of $22.5 billion.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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