Consolidation continues to be an important theme in the cannabis industry and we want to discuss the topic after SNDL Inc. (Nasdaq: SNDL) completed the previously announced acquisition of The Valens Company Inc. (TSX: VLNS) (Nasdaq: VLNS).

The cost of the acquisition was approximately $138 million (as calculated by using an implied value of $1.26 per share for Valens) which consists of common shares of SNDL and the assumption of Valens’ $60 million non-revolving term loan facility.

According to the press release, the combined company will have approximately $262.5 million of net cash and no debt (the total amount of cash is inclusive of SNDL and Valens cash, net of debt retirement from the transaction and estimated transaction costs as at January 16, 2023).

Valens is a Canadian Licensed Producer (LP) that has been highly focused on cannabis product processing and owns a diverse manufacturing platform. The company operates a multi-facility production platform with two co-located sites, an edibles-focused facility (acquired through Lyf Foods), a cannabidiol (CBD) production asset in Florida, and more.

The acquisition provides SNDL with additional exposure to the cannabis 2.0 vertical in Canada by leveraging Valen’s low-cost processing capability. We believe the acquisition will also allow SNDL to access a low-cost biomass sourcing network that should support the expansion of the entire business.

From cannabis retail operations in Canada to a CBD business in the United States (US), SNDL owns a portfolio of strategic cannabis assets. Going forward, we expect the management team to find synergies from the Valens transaction and will monitor how the story evolves from here.

Although we prefer other Canadian LPs to SNDL, we expect the transaction to be immediately accretive. Over the next year, we expect SNDL to report high profit margins and for the combined company to benefit from the unique capabilities of each operator.

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