Stifel-GMP: SNDL Acquiring Valens “Does Not Come As A Surprise”

On August 22, SNDL Inc (NASDAQ: SNDL) announced that it would be acquiring Valens Company (TSX: VLNS) for total consideration of $138 million in stock, or the equivalent of $1.26 per share. The figure represents roughly a 10% premium to the 30-day volume-weighted average price at the time of announcement, and they expect the deal to close during January 2023.

SNDL says that the acquisition will enable them to “offer a complete portfolio of branded products to consumers in Canada through its own supply and distribution channels.” It will also allow for SNDL to add “increasing optionality on biomass by pairing premium cultivation with low-cost procurement.”

SNDL notes that they expect to see “more than $10 million of annual cost synergies” while adding upwards of $15 million of incremental EBITDA annually.

Valens Company currently has only five analysts covering the stock, with many analysts lowering their 12-month price target estimate to $1.25 to reflect the transaction price. Out of the five analysts, one has a strong buy rating, three have buy ratings, and the last analyst has a hold rating on the stock.

In Stifel-GMP’s note on the news, they reiterated their buy rating on the stock and lowered their 12-month price target to reflect the transaction price. They say, “The transaction does not come as a surprise given SNDL’s existing ~8% ownership and management having previously been vocal about their intentions.”

They believe that this is a good deal for Valens for a few reasons, the first being that it removes the solvency and financing risk while having SNDL’s resources to execute its growth plan. Stifel-GMP says that Valens’ target of becoming profitable by year-end was “aggressive” while burning through $20 million during the second quarter and ending the quarter with $26 million in cash and $40 million in debt, “resulting in a share overhang from financing risk.”

They also believe that Valens’ shareholders will benefit from owning SNDL shares since they are “~150x more liquid than VLNS.” They also believe that Valens will be able to “materially improve distribution” via SNDL’s 185 cannabis stores in Canada.

Lastly, they note that Valens’ shareholders will now receive U.S exposure through SNDL’s SunStream Bancorp, which is a creditor to a number of multi-state operators. They add that due to the challenging market conditions in the U.S, there is an elevated potential for defaults, which would create “an opportunity for asset ownership.”

Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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