Why Canopy Growth Acquired BioSteel Sports Nutrition

Canopy Growth (CGC) (WEED), one of the major players in the Canadian cannabis space, is set to strengthen its footing. On October 2, Canopy announced the purchase of a 72% stake in BioSteel Sports Nutrition. The stock closed with a gain of 1.6% yesterday. What could be the motivation for acquiring a sports company? Let’s take a look.

Canopy Growth announced yesterday that it completed an all-cash transaction to purchase a majority stake in BioSteel Sports Nutrition. Canopy has a considerable investment from beer company Constellation Brands (STZ). Along with Constellation, the company intends to expand the cannabis beverage market.

Canopy intends to cover the sports nutrition market as well, which is BioSteel’s focus. According to today’s MarketInsider report, BioSteel’s products have been used by 70% of the teams in North America’s four major sports leagues. Its product line includes its Sports Hydration Mix, also known as #DrinkThePink, and other whey- and plant-based protein products.

This acquisition should expand CGC’s product and consumer base, as the company intends to expand its CBD market. BioSteel has a strong sports nutrition consumer base in the North American market, and including CBD (cannabidiol) in its products will be an addition of a new product line for Canopy.

Notably, BioSteel has more than 10,000 points of distribution in Canada and the US. So, this acquisition could help Canopy improve its sales and profitability.

According to an October 2 Bloomberg report, Canopy CEO Mark Zekulin said, “This acquisition allows us to enter the sports nutrition space with a strong and growing brand as we continue towards a regulated market of food and beverage products that contain cannabis.”

Zekulin continued, “We view the adoption of CBD in future BioSteel offerings as a potentially significant and disruptive growth driver for our business.”

The CBD component of cannabis has been found to have medicinal benefits, unlike the psychoactive component tetrahydrocannabinol (or THC). A recent Harvard Study discussed the health benefits of CBD. Notably, Canopy Growth and other cannabis players offer CBD-based products to consumers. I feel that Canopy Growth understands that consumers are more interested in trying natural medicinal products compared to prescribed pain killers.

A February 28 CNBC report stated that Canopy Growth is conducting several clinical trials to understand the effects of CBD on human and animal health. However, CBD products still face scrutiny from the FDA in the US. This could create a hurdle for Canopy to expand in the US market.

Peer Aurora Cannabis (ACB) also mentioned in its September 12 earnings call that it has entered into a partnership with the UFC (Ultimate Fighting Championship) in the US. This partnership could help ACB conduct more research on using CBD as a treatment for pain and recovery in high-performance athletes.

Canopy Growth missed analysts’ revenue estimate of 122 million Canadian dollars in the first quarter of fiscal 2020. The company reported net revenues of 90.5 million Canadian dollars in the first quarter. It also reported massive losses and missed its bottom-line estimates. These results dragged down the cannabis sector in August.

However, the outlook for the company still looks optimistic. Oppenheimer analyst Rupesh Parikh feels CGC could always capitalize on the global cannabis market and initiated coverage on the stock.

Analysts expect CGC’s revenues to be around 584 million Canadian dollars for fiscal 2020, which is a YoY increase of 139%. Meanwhile, its EBITDA could be -279.9 million Canadian dollars.

With this month’s launch of Cannabis 2.0, Canada plans to legalize edibles and concentrates. During this second phase of cannabis legalization in the country, Canopy Growth plans to launch edibles, beverages, and vape products.

In its first-quarter earnings call on September 15, the company discussed filing 56 patent applications for researching and developing vape oils and devices, pre-rolled joints, and cannabinoid isomers in the first quarter. To learn more, please read Canopy Growth: Getting Ready for Cannabis 2.0.

Aurora Cannabis (ACB) is also is planning to develop high-quality cannabis edible products. It also plans to expand into the vapes and concentrates market with its partnership with PAX Labs. Please read Cannabis 2.0: Aurora Cannabis Gears Up for Edibles Market to learn more.

Canopy’s peers are also planning on cashing in from the CBD business. Aphria (APHA) plans to launch a broader range of CBD products in Germany later this year. Recently, the company introduced CannRelief to the German market. Cann Relief is a CBD-based nutraceutical and cosmetics product line. Aphria also plans to introduce a broad portfolio of vapes and concentrate products after Cannabis 2.0 with its strategic deal with PAX Labs.

In September, Canopy Growth lost 3.5%, while Aurora Cannabis fell 20.1%. Aphria lost 18.5% during the month, while Acreage Holdings gained 1.5%.

To expand its footprint in the US market, Canopy Growth entered into an agreement to acquire Acreage Holdings (ACGRF). However, the merger entirely depends on marijuana legalization in the US on a federal level.

In our view, expansion into the CBD and edibles segment could help Canopy boost its profitability. However, the company’s current focus on expansion and acquisitions could increase its operating expenses. Because the cannabis industry is an evolving industry, growth in the sector could take time.

At the same time, government regulations play a crucial role in the industry. Because marijuana is not federally legalized, higher black market sales result. So, the cannabis companies have suffered this year along with other factors. Please read Which Cannabis Stocks Have Lost More than 40% in 2019? and Cannabis Stocks: Will Tough Times End Soon? to learn more.

However, we still feel there is room for growth if and when the US legalizes marijuana. Stay with us to gain more insights into the cannabis industry.