Could HEXO Corp. (TSX:HEXO) or Cronos Group Inc. (TSX:CRON) Be the Next Weed Stock Takeover Target?

HEXO Corp. (TSX:HEXO) and Cronos Group Inc. (TSX:CRON)(NASDAQ:CRON) might be candidates in the next round of cannabis stock takeovers. Is one more attractive?

| More on:

Consolidation has been the name of the game in 2018 for Canadian cannabis stocks.

Lets take a look at HEXO (TSX:HEXO) and Cronos Group (TSX:CRON)(NASDAQ:CRON) to see if one might be an attractive buy for the larger players in the marijuana stock sector.

HEXO

Quebec-based HEXO’s corporate headquarters isn’t too far from industry leader Canopy Growth. In fact, the trip from Gatineau to Smiths Falls is a mere 80 km and only takes about an hour, depending on traffic.

The close proximity of the offices and production sites might appear to make a tie-up appealing, but Canopy Growth’s CEO has said he is more interested in international acquisition opportunities than in additional Canadian ones. That might be the case, given the company’s existing strong presence in the Canadian market. Canopy Growth was an early mover in the consolidation game, buying up key competitors when prices were cheaper than they are today.

Another reason Canopy Growth might not be interested in HEXO is the potential conflict on the drinks side. Canopy Growth is 38% owned by Corona-maker Constellation Brands. HEXO has an agreement with Molson Coors Canada to set up a joint venture to develop cannabis-infused beverages.

A more likely suitor could be Aurora Cannabis. The company has already made two large acquisitions in the Canadian marijuana sector this year, spending $1.1 billion for CanniMed and $2.5 billion for MedReleaf. To date, Aurora Cannabis doesn’t have a dance partner in the beverage industry, so a takeover of HEXO would quickly sort that out, and Molson Coors would be an appealing choice.

Aurora Cannabis isn’t afraid to do big deals, so HEXO’s current market capitalization of $1.6 billion shouldn’t scare it off. At the time of writing, Aurora Cannabis has a market capitalization of $11.3 billion.

Cronos Group

Cronos Group is playing catch-up in Canada and is expanding its presence in Europe, Australia, Israel, and Latin America.

The European and Latin American markets are home to more than 1.1 billion people, so the appeal in these regions for long-term growth opportunities could entice one of the larger players to scoop up Cronos while it is getting established.

Cronos has another interesting side to the business that could make it attractive. The company has partnered with Ginko Bioworks to conduct research that would remove the key cannabinoids from the plants and reproduce them in a lab environment. The potential uses are extensive in the wellness industry, and in fragrance, cosmetic, and consumable applications. If a company can succeed in eliminating the need to spend billions on greenhouses to grow plants, it would completely disrupt the industry.

Canopy Growth gets a lot of media attention for its planned forays into the recreational market and cannabis culture brands, but the health side of the industry is very important to the company, so Cronos might be an interesting target.

At the time of writing, Cronos has a market capitalization of $2.4 billion.

Should you bet on a buyout?

HEXO and Cronos are both trading at very expensive levels after the rallies that occurred in the past two months. As such, investors should be cautious when starting a new position.

Eventually, I suspect the two companies will be bought, but when that will happen and at what price is anyone’s guess. If you want to make a speculative investment, I think HEXO might be the first to go, but I would wait for a better entry point.

Other potential home run opportunities exist in the market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stock mentioned. The Motley Fool owns shares of Molson Coors Brewing.

More on Investing

Canada national flag waving in wind on clear day
Tech Stocks

Trump Trade: Canadian Stocks to Watch

With Trump returning to the presidency, there are some sectors that could boom in Canada, and others to watch. But…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Investing

Is Canadian National Railway Worth Buying for its 2.2% Dividend Yield?

Let's dive into whether Canadian National Railway (TSX:CNR) is a top buy for long-term investors at this point in the…

Read more »

nuclear power plant
Energy Stocks

Is Cameco Stock Still a Buy?

Cameco stock recently reported earnings that showed the Westinghouse investment is creating some major costs. But that could change.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

Start line on the highway
Investing

2 No-Brainer Growth Stocks to Buy Now With $5,000 and Hold Long Term

Market conditions today are ideal for growth investing, and two rising stocks are no-brainer buys in November.

Read more »