Spreading Their Canopy: What Diversification Means for This Marijuana Stock

Canopy Growth Corporation (NASDAQOTH:TWMJF) is aptly named, considering growth is central to both its title and business model. Accordingly, it comes as no shock that Canopy Growth, the world’s largest marijuana stock by market cap, has continued its expansion through a series of acquisitions and strategic partnerships. The recent surprise has come through Canopy’s next potential acquisition and the specific direction its growth might take. 

According to a recent Bloomberg report, marijuana stocks company Canopy Growth is vying with other bidders to purchase Alcaliber SA, a Spanish morphine producer.

Final bids are expected in the coming week or so, with a potential buyer being named in early April. Canopy’s successful acquisition of Alcaliber would mean its first significant deal outside of the marijuana industry. However, at this critical time in the Canadian industry, acquisition of a morphine maker could prove a distraction for Canopy Growth.

What would marijuana stocks from Canopy Growth stand to gain from this deal? The most obvious gain would be diversification.

With this successful acquisition under its belt, marijuana stocks Canopy would become the top dog in not only the marijuana industry, but, also the morphine industry. Alcaliber is globally ranked as one of the largest morphine producers. In 2014, it’s global morphine production was 27%. The company also produces thebaine – a stimulant version of opioid, similar to morphine without being a depressant – accounting for almost one-fifth of the global supply.

The purchase of Alcaliber would mean much more than expanding into another industry; it would significantly expand Canopy Growth’s global footprint. Alcaliber has achieved far greater international diversification than Canopy Growth, operating presently in 67 countries, whereas Canopy operates in several. The companies themselves possess similarities; both share a focus on agricultural crop growth and function within highly regulated industries.

Alcaliber may sell for roughly $250 million, which should be not be an overreaching price for Canopy Growth. The company ought to have sufficient cash on hand to acquire Alcaliber and avoid debt due to its latest bought-deal financing.

What might marijuana stocks from Canopy Growth stand to lose if this deal were finalized?

Investors can see that Canopy Growth has some attractive reasons for wanting to acquire Alcaliber; however, the more compelling arguments are why such a deal could be a tactical error on Canopy’s part.

One of the main arguments against this deal would be the potential for distraction away from where Canopy’s energies should be focused: making the most of the expanding global cannabis market. Canada is but a few months away from legalizing recreational cannabis – a market that the Canadian government predicts will generate an additional $4.2 to $6.2 billion annually, according to conservative estimates. Canopy could capitalize on opportunities for expansion into other countries, such as Germany, which recently legalized medical cannabis.

The timing seems particularly bad for considering an investment in the opioid industry. Even if Canopy Growth were capable of capitalizing on the rapid growth of the marijuana industry and taking on diversification into the morphine industry at the same time, the U.S. is in the midst of an opioid epidemic; the U.S. is not alone in this regard as other countries are dealing with significant consequences from addiction and abuse of opioids.

The focus of several biopharmaceutical companies has shifted to development of alternative painkillers to replace opioids like morphine and oxycodone. With this shift comes the possibility of the opioid market falling into serious decline in the coming years. Marijuana stocks company Canopy Growth could find better places to invest its generous cash stockpile than an industry that is in crisis.

Marijuana stocks investors ought to note that Canopy Growth has offered no official statement regarding bidding on Alcaliber. 

The sources used in Bloomberg’s report were anonymous, merely described as “familiar with the matter.” The company itself has not come out with an official statement one way or the other. It’s also possible that, even if Canopy bids on Alcaliber, another company could come in and place a higher bid. Bloomberg reported Alantra Partners SA, a Spanish investment firm, and GHO Capital, a private equity firm based in London, were attempting to purchase Alcaliber.

Canopy Growth has experienced a rapid rise in the marijuana stocks industry, but, it remains a small company that lacks experience in other industries. Even placing concern for the future of the opioid industry aside, a decision from Canopy to step beyond its area of expertise during a critical time in the industry seems foolhardy.

If Canopy Growth Corporation and its marijuana stock investors want the company to continue living up to its name, acquiring Alcaliber does not appear to be the best strategy for accomplishing its goal. The good news for weed stocks enthusiasts seeking marijuana stocks to invest in is that nothing has been finalized at this point and Canopy could pass on the opportunity altogether.

(For more news on cross-industry acquisitions, read Buying Into Booze Top Cannabis Stock Aurora Closes Deal with Big Liquor.)