The Smiths Falls, Ont.-based company announced a deal on Thursday to acquire privately-held Wana Brands, a Colorado-based cannabis edibles brand that claims to lead the category by market share across North America.
Canopy says the transaction is similar in structure to its planned takeover of New York-based multi-state operator Acreage Holdings (ACRHF), a landmark deal when it was announced in 2019 that required federally permissible pot sales in order to be fully consummated.
Under the terms of the deal, Canopy has separate call option agreements with three Wana owner entities to acquire 100 per cent of the company. Canopy says it will make an upfront cash payment of US$297.5 million. When the rights to acquire each Wana entity are exercised, Canopy says it will make a payment equal to 15 per of the fair market value with cash, shares or a combination of both, at its discretion. The company did not disclose the total expected value of the deal.
"There are some extremely highly valued businesses, and there's a lot of businesses that are struggling to get profitable. And then there are some in the sweet spot. We consider Wana to be in that sweet spot," Klien told Yahoo Finance Canada in a virtual interview on Thursday.
Toronto-listed Canopy shares climbed 4.23 per cent to $17.21 at 9:49 a.m. ET. The stock has fallen more than 47 per cent year-to-date.
Companies listed on major North American exchanges, like Canopy, are restricted from directly owning plant-touching cannabis assets in the U.S. while the drug remains federally illegal in that country. The company also has a conditional ownership interest in TerrAscend (TER.CN), which operates in multiple U.S. states.
Wana claims to be the top cannabis-infused edibles brand in North America, with gummies and other products available in 12 states and nine Canadian markets. The company is looking to expand to 20 states before the end of 2022. According to industry data provider Headset, gummies account for 71 per cent of all edibles purchases in tracked U.S. states. The category also includes infused beverages, chocolates, and other products.
In Canada, Wana has a licencing agreement with London, Ont.-based edibles-maker Indiva (NDVA.V). Those companies announced an extension of that deal in February, a five-year term that may be extended for three additional five-year periods. In a Sept. 7 note to clients, Raymond James analyst Rahul Sarugaser praised Indiva’s roughly 50 per cent share of legal cannabis edibles sold in Canada, calling the company “an M&A target if we’ve ever seen one.”
Klien says acquiring Indiva would not fit with the company's efforts to minimize its Canadian production footprint.
"We hope this is a basis for building a strong relationship with Indiva. We've liked what Indiva has done over time. Canopy and Indiva are jointly going to the provincial boards this morning to say that it will remain business as usual until further notice," Klein said.
Klein said Canopy and Wana's team clicked from their first meeting about six months ago. He notes being particularly impressed by Wana's founder, Nancy Whiteman, who has been described as the "Martha Stewart of edibles."
"I love Nancy's approach to business. She literally started this in her kitchen, and built it into a business that spans multiple states, and is profitable," he said.
Canopy already offers a line of gummies infused with non-intoxicating CBD backed by the real Martha Stewart in the U.S. market. Klein said the two brands will not conflict due to Stewart's refusal to endorse products with THC, the main cannabis compound responsible for getting users high.
"Martha has been really clear that she does not want her brand to extend into THC products," Klein said. "She's okay with CBD. She's okay with other minor cannabinoids. But she's not interested in bringing her brand into the THC space."
Canopy sees Wana’s licensing model as an opportunity for growth ahead of potential U.S. cannabis legalization. The private company is profitable, “with a track record of generating strong revenue growth and category-leading gross and EBITDA margins,” according to Canopy.
Analysts expect Canopy will fall short of its goal of turning a profit within the next three quarters. Klein has led a sweeping overhaul since taking the top job in January 2020, involving mass facility closings and staff layoffs as the company faced stagnant revenue and steep losses.
Earlier this year, Canopy acquired Supreme Cannabis in a $435 million deal, and vape specialist Ace Valley, in a bid to offer more profitable, higher-end products.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.