Alberta-based cannabis company Sundial Growers (NASDAQ:SNDL) is expanding its footprint with the planned purchase of Alcanna (OTCMKTS:LQSIF) Canada’s largest private liquor retailer. Any current upbeat forecasts about SNDL stock will likely leverage news of the approximately $277 million all-stock deal.
I’ll jump into the details of the deal in a moment. First, I’d like to simply state that I believe the acquisition changes little for Sundial Growers’ fundamental picture. And while SNDL stock spiked 20% following the news, I still believe it is a stock to avoid.
SNDL stock shot up 725% between the start of 2021 and its high of nearly $4 in February. Of course, there was no fundamental reason for shares to trade at that level. They quickly fell and have spent the majority of 2021 trading below $1.
Alcanna Acquisition Makes Sense
The impetus behind the deal from the perspective of Sundial Growers is fairly straightforward. Alcanna, like Sundial, is an Alberta firm. It has 171 locations, which are primarily in Alberta as well. Ideally, Sundial will be able to sell its cannabis products in Alcanna’s retail locations, thus improving Sundial’s top line.
That’s the basic premise: synergies. And they don’t stop there. Alcanna’s strategic partner, in which it holds a 63% equity interest, is Nova Cannabis (OTCMKTS:NVACF), which is listed on the Toronto Stock Exchange. Nova Cannabis operates 62 retail locations across Alberta, Saskatchewan and Ontario.
In short, Sundial Growers is looking for the deal to provide markedly improved growth potential. Management says it expects the transaction will lead to $15 million in Canadian dollars (CAD), or more than $12 million in U.S. dollars, in additional EBITDA on an annual basis.
To me, this is where the issue arises.
EBITDA Is Not the Problem
Even if the company sees an additional $15 million CAD in annual EBITDA as a result of the Alcanna acquisition, it likely won’t matter.
In all of 2020, the company posted EBITDA of negative $71 million CAD. In May, Sundial surprised the Street by reporting positive adjusted EBITDA of $3.3 million CAD for the first quarter. While SNDL stock initially popped on the news, shares didn’t hold onto their gains.
What I’m getting at is that investors likely won’t reward SNDL stock based on improving EBITDA figures. And digging into Sundial’s financials, one thing becomes abundantly clear: Sundial’s operations are weak.
Through the first half of 2020, Sundial posted an operating loss of $70.8 million CAD. Through the first half of 2021, that figure jumped to $186.7 million CAD. That means operating losses more than doubled during that period.
The Bottom Line on SNDL Stock
Rather than bid SNDL stock higher on rising EBITDA, I think investors will continue to punish shares based on operating losses.
While the Alcanna acquisition should help increase Sundial Growers’ operational footprint, the numbers show it is far from a strong operator. There is little to suggest it can efficiently fold Alcanna into its larger operations. If anything, expect the opposite.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.