Canopy Growth (CGC) made another deal that on the surface appears promising. Unfortunately, one has to wonder how the cannabis giant can manage such a wide empire and question the willingness of the skincare company to exit the promising market via an all-cash transaction.
Cash Deal
Canopy Growth agreed to purchase U.K. skin-care brand This Works for C$73.8 million. The London-based company is best known for a sleep-aiding pillow spray along with skincare products.
The positives of the deal is that Canopy Growth can further expand CBD-infused products in Europe by working with a leading health and wellness company with a European distribution network and retail connections in 35 countries. The negative is that the owners of This Works want to cash out versus taking stock from the cannabis giant.
CEO Dr. Anna Persuad specially points out the company being passionate about the opportunity in CBD beauty products, but apparently the shareholders aren’t so interested in investing in the space. The shareholder could’ve either turned This Works into a CBD play or taken shares in the larger Canopy Growth with a market valuation of $15.5 billion.
The large cannabis company has C$4.9 billion in cash from the Constellation Brands (STZ) investment making such cash deals easy to swallow. The question is whether they are easy to manage and grow going forward.
Too Many Deals
In the last month alone, Canopy Growth has bought This Works, Cannabinoid Compound Company and the rights to purchase Acreage Holdings (ACRGF). In just a month, the large cannabis company has expanded into a European skincare company, a European medical CBD provider along with a multi-state operator in the U.S.
All of the companies are just loosely related to the cannabis industry that is expected to be a global industry with annual revenues in excess of $100 billion. Even a company the size of Canopy Growth can’t be all things to all consumers and patients looking to consume cannabis and CBD-infused products.
On top of just developing CBD-infused products for health and wellness or medicine, Canopy Growth is also working on an industrial hemp park in New York. The company is spending hundreds of millions on growing hemp to produce CBD and the deal suggests a global plan with thousands of acres planted to cultivate and process hemp-derived CBD.
The company promotes vertical integration, but very few industries grow their own commodities used to create beauty and wellness products. In addition, opening retail stores and working on pharma related drugs makes for a wide swath of business where focused companies are likely to have better outcomes in the fast moving cannabis sector.
Takeaway
The key investor takeaway is that owning a brand like This Works seems logical in the rapid market shift into CBD-infused products. A company with broad expertise in the health and wellness sector appears positioned to thrive in this new market opportunity, but the issue is the combination with all of the other recently bought businesses at Canopy Growth. Not to mention, the old shareholders aren’t passionate enough about the business to want a piece of this investment vehicle.
All of the signs continue to point towards a business nearly impossible to manage and compete with units focused primarily on each individual market whether medical cannabis in Canada or hemp cultivation in the U.S. or CBD wellness products in Europe. Investors should follow the This Works shareholders and cash out of the stock.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has no positions in Canopy Growth stock.
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