Marijuana legalization in the U.S. could be years away from becoming a reality. However, that isn’t stopping Canadian cannabis businesses from staking out positions beforehand. They want to be ready to go when the market opens up, and that is why there has been an uptick on the mergers and acquisitions (M&A) front of late.
Last week, Valens (OTC:VLNCF) became the latest name to announce its entry into the U.S. market with the acquisition of Green Roads, a U.S. company that makes hemp-derived cannabidiol (CBD) products. Let’s take a closer look at what it means for Valens, and for the industry in the U.S.
What this move does for Valens
On a pro forma basis, Valens says that the combined companies would have brought in 111.6 million Canadian dollars in revenue last year. Over the trailing 12 months, Valens has recorded revenue of CA$72 million, meaning Green Roads generates roughly CA$40 million in sales on an annual basis.
But the deal is more about just increasing revenue for Valens. The big picture is about gaining traction in the U.S. and potentially tapping into Green Roads’ distribution network. The company’s products — oils, edibles, softgels, and even coffee — are sold in 7,000 retail locations in the U.S. The company focuses on wellness, and its online shoppers can choose products based on whether they are looking to improve their sleep, relax, reduce their stress, or relieve pain.
Valens is spending $40 million in a combination of cash and stock on this deal, and it expects the transaction to close as early as next month. It would then be able to incorporate what it says is the largest (privately owned) CBD company south of the border into its operations. The deal is able to go through because it is not against federal laws in the U.S., since Green Roads’ products originate from hemp, which the U.S. government legalized in 2018 under the Farm Bill.
Should multistate operators be worried?
Having another Canadian cannabis company enter the U.S. market isn’t likely going to concern large multistate cannabis producers like Trulieve Cannabis or Curaleaf. Their focus is on non-hemp products that include high levels of tetrahydrocannabinol (THC), which can reach a broader customer base. (Hemp products cannot contain more than 0.3% THC.) And so while acquiring Green Roads will open up some new opportunities for Valens, it isn’t going to be competing in all the same categories that large multistate operators are in.
Brightfield Group projected last year that by 2025, the CBD market in the U.S. (which includes hemp) will be worth $16.8 billion. A forecast from BDSA has the total U.S. pot market (including THC products) reaching $34.5 billion by the same year.
Tapping into the hemp market only gives Valens a small slice of all this. But that’s not unlike the moves that other Canadian cannabis companies have been making for the sake of any exposure to the U.S. ahead of legalization. Aurora Cannabis acquired CBD product maker Reliva last year, and in 2019, Cronos acquired Lord Jones, a maker of CBD beauty products.
Valens’ acquisition of Green Roads is simply the latest instance of Canadian companies trying to jockey for position ahead of time. And while it won’t shake up the industry today, the battle lines are being drawn in what will eventually become a much more competitive cannabis market post-legalization.
Is Valens a buy on this news?
Today, Valens is a decent buy, trading at roughly 7 times its sales. Although that is slightly expensive, given that the average stock in the Horizons Marijuana Life Sciences ETF trades at a multiple of less than 6, it is a bargain compared with big names like Cronos and Canopy Growth, where investors are paying 62 and 25 times sales, respectively. Adding Green Roads into the mix will help bring Valens’ multiple down by even more.
In the past year, Valens’ stock has risen by 84%, which is in line with how the Horizons ETF has performed. For investors looking for a well-valued stock with exposure to the U.S. market, Valens may be a good option. But investors will want to be careful, because by the time legalization actually takes place, things could look a whole lot different.
In its press release announcing the acquisition, Valens noted that it analyzed more than 100 companies in the CBD space before picking Green Roads. That tells me that there could be a lot more M&A activity out there still to come.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.