What happened
Shares of Canadian cannabis company SNDL (NASDAQ: SNDL) -- formerly known as Sundial Growers -- dropped today after announcing a new acquisition. SNDL investors don't seem too pleased with the idea, however. SNDL shares dropped as much as 10% on the news and were still down 5.3% as of 2:25 p.m. ET.
So what
SNDL will be acquiring Canada-based The Valens Company in a transaction worth the equivalent of about $106 million. Valens shareholders will receive about one third of a common share of SNDL in the all-stock transaction. But that didn't appear to make them happy, as Valens shares were also down by 10%.
Now what
SNDL already owned more than 10% of Valens after its latest investment made in May 2021. But that investment hasn't been a good one for SNDL, as it has bought into Valens at an average cost basis of about $8 per common share prior to today's announcement and a subsequent 1-for-3 reverse stock split in Valens shares. Valens traded for about $0.85 per share after the announcement today.
Considering the initial investment was made "for investment purposes," investors may feel today that SNDL is just pouring in good money after bad. SNDL says the combined companies will create a top-10 supplier in the Canadian market with an overall cannabis market share of 4.5%.
Vertical integration hasn't gone well for other Canadian cannabis firms, however. Aurora Cannabis, for example, moved in the other direction in 2020 by divesting its stake in Alcanna at a loss just over two years ago. Investors today seem to think SNDL may be following a similar path.
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Howard Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends The Valens Company Inc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
