The Largest Closed and Disclosed M&A Deal of the Week:

• On January 17, 2023, SNDL Inc. (SNDL: Nasdaq, the fourth largest Canadian LP with a market cap of approximately $600M, announced the closing of its purchase of The Valens Company (VLNS: Nasdaq)(VLNS: TSX), a concentrate manufacturer.
  • Equity consideration of $58.26M was paid entirely in SNDL stock. SNDL also assumed approximately $44.8M of VLNS debt for a total transaction value of $103.1M, representing about 1.4x VLNS LTM revenue and .86x consensus 2023 revenue. (Valens had a slightly negative projected EBITDA for 2023).
  • The acquisition multiple strikes us as reasonable, given Valens’ liquidity, leverage, and profitability profile.
  • One of SNDL’s main justifications for the acquisition is that Valens gives SNDL low-cost biomass sourcing, and the combined company will be able to extract around C$10M in synergies per year. We are skeptical of this rationale. First, the market is awash in excess supply, and access to low-cost biomass does not seem like a scarce attribute. Secondly, the only way to extract that degree of “synergies” is through a great deal of bloodletting, a process that tends to destroy the culture of the acquired entity. A better bet might have been to buy Valens from an eventual bankruptcy sale.
  • We do understand Valens’ motivation to sell. Let’s call it survival. It is telling that Valens shareholders received zero cash in the deal. The company was in a weak position to negotiate. Out of the eight Canadian non-biotech companies with market caps between $20M and $100M, the Viridian Credit Tracker model ranks Valens as third from the bottom, being edged out by the Green Organic Dutchman (TGOD: CSE), and Fire and Flower (FAF: CSE).