The cannabis industry is very competitive. Marijuana producers in Canada are struggling to grow their market share, and the easiest way to get bigger is through mergers and acquisitions.
Cannabis producer Sundial Growers has been busy with its own M&A this year, but investors shouldn't rule out the possibility of a larger company acquiring it. I think the company is trying to make itself a more attractive acquisition target.
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1. It's a cash problem.
Sundial's shares went up to a high of $3.96 earlier this year. The company issued shares multiple times. It had an unrestricted cash balance of 610 million Canadian dollars after it announced the closing of the second offering.
Alcanna, a liquor store retailer, was acquired by Sundial in October. Sundial's unrestricted cash balance as of November 9 was CA$571 million, showing only a modest change since February.
Sundial is an attractive acquisition target for an industry that is burning tons of cash. Sundial has no debt on its books.
Sundial had no debt on its books as of the end of the third quarter, and its main long-term liabilities were valued at just over CA$20 million. The total of its liabilities was CA$83.6 million, which is less than its cash balance and less than its marketable securities balance. The company had long-term debt and its total liabilities were close to doubling.
If a business taking on the acquisition already has a lot of debt, it can be bad. With Sundial, a cannabis company could acquire the business and improve its debt-to-equity ratio, making it more attractive to investors. Sundial is an acquisition that wouldn't be too complex if it kept its balance sheet clean.
3. Sundial has changed its operations.
Sundial has shifted away from being a producer to being a large retailer through acquisitions this year. Alcanna has more than 170 liquor stores to add on top of that.
Sundial's financials are sure to get a boost, even though it's too early to tell. Alcanna has reported a profit of $82 million on revenue of $656 million over the last year. Sundial has incurred losses of CA$239 million while generating just CA$47 million over the same period.
The company reported an adjusted earnings before interest, taxes, depreciation, and amortization profit of CA$10.5 million in the third quarter, compared to a loss of CA$4.4 million a year ago. Sundial included results from Spiritleaf in the first quarter.
Sundial can become a much larger and more noticeable business through these key acquisitions. It will have more of an identity as a top cannabis retailer. Sundial could fit the bill for cannabis businesses looking to bolster market share without taking on debt.
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