Canopy Growth Corp (TSE:WEED) Freezes As MedReleaf Buyout Ramifications Pondered

Canopy Growth Corp (TSE:WEED) (OTCMKTS:TWMJF) (FRA:11L1) remained in a deep freeze today, as investors considered the consequences of a potential MedReleaf Corp (TSE:LEAF) (OTCMKTS:MEDFF) takeover deal. Should one be forthcoming, this would bring large spillover effects to competing companies, as the top tier jockeys for industry supremacy.

The latest news coming from the MedReleaf camp is a perfect example of plausible deniability. After being halted for trade by the IIROC at 10:15am, the company issued a press release three hours later to deny “agreement to effect any particular transaction” had taken place. Fair enough. But the press release is notable for what was also said; that is, MedReleaf “confirms that it engages from time to time in discussions with other industry players, including Aurora Cannabis, regarding various alternatives.”

In other words, MedReleaf is still shopping itself around to the highest bidder, and the confirmed interest by Aurora Cannabis is indeed real.

Given this monumental news, it perhaps isn’t surprising Canopy Growth investors hit the pause button today. After all, if Aurora Cannabis Inc. pulls the trigger on a major deal (ACB and LEAF were halted together), Canopy Growth would have some decisions to make. They simply aren’t used to competitors with more reach and scale in key areas of the refined goods market, which an ACB-LEAF deal would bring.

While the economics and diluting effects of a possible deal can be debated (pending deal structure, of course), there’s no question there’s an asset arms race going on. The quest to obtain the biggest scale, lowest cost, best distribution channels etc. is especially important now, because Big Cannabis understands the power of first-in advantage. That is, once the Memorandum of Understanding (MOU) agreements are signed and distribution channels are entrenched, it’s very hard to get displaced by competitors unless something unsatisfactory happens. Being on the outside looking in, at this stage, is a bad business proposition.

Obviously for Canopy Growth—with or without a competing MedReleaf deal—this is not the case. The company continues to have among the best and most recognizable brands in the industry. It’s now anchored in at least eight different countries, which its recent foray into the Czech Republic. It also has amazing institutional backing, including the likes of global spirit & beverage behemoth Constellation Brands. Canopy Growth will continue doing what it’s doing irrespective of the maneuvering going all around. It’s worked splendidly so far, and thus will continue.

Still, one wonders whether Canopy would make a similar countermove to protect its turf—especially considering the medical refined good market should yield the highest margins. Although Canopy its own stellar strain and medical portfolio, they would clearly ‘lag’ an ACB-LEAF consortium on the medical side.

Thus, in my view, today’s price action is the quintessential case of investors taking a wait-and-see approach. This indecision has the potential to extend into tomorrow’s trade—and into next week for that matter. Quite simply, investors are attempting to make sense how a possible deal affects Canopy’s sideline war chest and/or future stock attribution. As per recent unaudited interim consolidated financial statement, Canopy Growth was sitting on $237,708,000 cash and cash equivalents on December 31, 2017. Indecision clearly ruled the day.

Canopy Growth finished higher by $0.29 to $29.96/share (↑0.98%). Volume finished at 2,796,323 shares, around ↓23.40% lower than yesterday despite the merger theatrics. Overall, Canopy is still encased in the “great formation” boundaries as described by Midas Letter one week ago. Closing price has wedged itself between the 50 and 100-Day simple moving average. Here’s an updated look on where we stand:

Mid/large-cap cannabis stocks held up notably better than their small cap counterparts. We expect interest in some select names will heighten should MedReleaf get taken over—mainly as more reasonably-valued consolation prizes of Big Cannabis as they attempt to maintain scale. Consolidation would be the natural conclusion to the legalization endgame we’ve been expecting all along. Not just in Canada, but across the world.

Here’s how the rest of the cannabis sector played out today.

Original article: Canopy Growth Corp (TSE:WEED) Freezes As MedReleaf Buyout Ramifications Pondered

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