The pace of mergers and acquisitions in the Canadian cannabis industry is expected to intensify this year, possibly eclipsing initial public offerings as the sector begins to mature.
The early days of the fledgling cannabis industry’s growth were characterized by a flood of IPOs as companies looked to finance their expansion, particularly ahead of the federal government’s legalization of recreational marijuana in October of last year.
That frenetic activity is likely to slow this year, according to a recent report on the Canadian IPO market from consultancy firm Deloitte Canada. Now, the sector is turning its attention to consolidation, as cannabis producers search for competitive advantages and the efficiencies that come with scale.
“As the cannabis sector continues to evolve, making acquisitions that provide scale and access to international growth will become increasingly important for licensed producers," said Jennifer Maeba, the leader of Deloitte Canada’s IPO advisory practice.
Already, takeovers in the sector jumped into the billions of dollars in 2018. Major deals announced last year included Aurora Cannabis Inc.’s $3.2-billion takeover of MedReleaf Corp., its $838-million buyout of Cannimed Therapeutics and Aphria Inc.’s $425-million takeout of Nuuvera Inc. Aphria has since come under the scrutiny of short-sellers over its acquisition of a marijuana company with operations in Latin America and Jamaica. It has also become the target of a hostile, all-stock offer from U.S.-based Green Growth Brands Inc.
U.S. firms are poised to pick up the slack on the IPO front, Ms. Maeba said. “What we are expecting is that there will continue to be a lot of northbound activity from U.S.-based issuers that are continuing to view Canada has a hub of finance for the cannabis sector,” she said.
“We’re also continuing to see a lot of cannabis-related companies looking to Canada, whether it be on the TSX or the CSE,” she added, citing retail brands, extractive technologies and hemp-based products as examples. “Any of these connected enterprises are also evaluating the Canadian market.”
David Kideckel, an analyst at AltaCorp Capital, predicts that mergers and acquisitions will be a “major focal point” for the cannabis sector in 2019.
Mr. Kideckel sees no let-up in the multibillion-dollar trend of major consumer products companies acquiring or taking positions in cannabis companies. In 2018, Constellation Brands Inc. made a $5-billion investment in Canopy Growth Corp., aiming to add a new series of intoxicant product lines to its alcohol beverage business. A few months later, Altria Group Inc., the maker of Marlboro cigarettes, agreed to pay $2.4-billion to acquire a 45-per-cent stake in Cronos Group Inc.
Large pharmaceutical companies have been notably absent from the action so far. Mr. Kideckel notes that Tilray Inc. and Novartis AG, as well as CannTrust Holdings Inc. and Apotex Inc., have teamed up on distribution agreements on the medical marijuana front, and once the U.S. regulatory picture gets clearer, the industry will likely look to establish large footholds. “Where we feel there’s a lot of value to be added here is from big pharma coming into the space,” he said.
With so many players in the sector – AltaCorp said there are more than 100 publicly listed Canadian and U.S. companies – consolidation is only going to pick up steam. Indeed, firms such as Aurora and Aphria have played that role for more than a year.
As with any other industry, investors will hold their companies to account on financial projections and operating plans, and those that miss targets and disappoint the market will come under pressure, Mr. Kideckel said. “And that’s when you might see a bigger entity come in and scoop them up."
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