Looking for growth outside of its former focus on recreational pot, Canopy Growth (CGC) has acquired a majority stake in BioSteel Sports Nutrition, a leading producer of sports nutrition products.
BioSteel has over 10,000 distribution points in Canada and the U.S., and has partnerships with a number of professional sports leagues. It's also continuing to expand in the European market.
Terms of the deal weren't released, but Canopy has acquired 72 percent of BioSteel in an all cash deal. There is also a path included to take full ownership in the company.
In this article we'll look at the potential short- and long-term implications of the deal on Canopy's performance.
What BioSteel is
BioSteel primarily competes in the sports nutrition and hydration market segment. Its CBD-based products are developed in alignment with different laws spread across different nations and domestic jurisdictions, and are made up of natural ingredients.
As mentioned, it already has over 10,000 distribution points in Canada and the U.S. alone, and that number will continue to climb when including all the markets it's expanding to.
A major impetus behind the growing usage of CBD-based products is the opiod crisis from prescription drugs that have devastated or ended many lives. Demand for healthier alternatives for pain management is rapidly increasing.
The company has enlisted an impressive array of professional athletes endorsing the company's products, including former Edmonton Oilers great Wayne Gretsky, and its current superstar captain Connor McDavid, Dallas Stars star Tyler Seguin, Dallas Cowboys running back Ezekiel Elliott, Toronto Blue Jays third baseman Vladimir Guerrero Jr., and golf pro Brooke Henderson, among others.
It also has partnerships in place with Athletics Canada, Canada Basketball, the Professional Hockey Players' Association, and USA Hockey.
Potential of the deal
Based upon the decision by Aurora Cannabis to enter into a partnership with the UFC to do research on ways CBD-enhanced products can benefit the athletes, it appears a the larger cannabis companies are looking to sports as a major, long-term growth market.
In the case of Canopy Growth, the immediate impact on its top and bottom lines should come from the existing products and distribution network in place, once the deal with BioSteel closes.
With Canopy's recreational pot sales under pressure, the company does need a catalyst that will boost its performance in the short term, while scaling for a long-term positive impact. Selling CBD-based products into the existing professional sports market will help Canopy in that regard.
The long-term value of the deal is what is most important for Canopy Growth. When you see deals by cannabis companies with professional sports exposure, it should be understood that this isn't only a play on a relatively small number of professional athletes that represent an important, but limited market.
Rather, what this is is a play on sports in general, including the millions of amateur athletes in the world. When that scales and is known by the public, those that are need to treatments for pain and possibly other ailments, will look increasingly to CBD for relief.
That's the real value of this deal, and why the larger companies with significant production capacity are looking to professional athletes to build out their CBD businesses. This is the real potential of this deal.
AMD has a cautiously optimistic Moderate Buy consensus rating from the Street. This breaks down into 9 'buy' and 6 'hold' ratings in the last three months. We can also see from TipRanks that the average analyst price target is $36.55 - 56.80% upside from the current share price.(See CGC's price targets and analyst ratings)
Although it's a little concerning that Canopy Growth has decided to not reveal the terms of the deal at this time, assuming the price it paid isn't outrageous, this should be considered a positive catalyst for the company, based upon immediate sales benefit, and the long-term potential associated with the overall sports sector, which including amateur athletes, numbers in the millions.
This is important because there will always be need for pain management among athletes and those that engage in physical jobs or exercise. With over 10,000 outlets to immediately sell out of, and the rapidly growing CBD market, if Canopy can capture decent market share, it's going to be a game changer for the company over the long haul.
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