A deal-making frenzy in the nascent cannabis industry is giving Canaccord Genuity Group Inc., one of Canada's largest independent investment banks, a significant boost after it struggled for the better part of a decade.
Buoyed by a sudden surge in demand for cannabis stocks and a rebound in revenues from its Canadian division, Canaccord posted record revenue and a $37-million profit – its best in seven years – in the quarter that ended in December. Revenues from its life sciences investment banking group, which handles the marijuana sector, soared and, at 32 per cent, now comprise the largest share of the dealer's investment banking and advisory revenues in fiscal 2018.
On a call with analysts on Wednesday, chief executive officer Dan Daviau said he is confident the jump in business will continue. In the past month alone, Canaccord bankers advised Aurora Cannabis on a $1.2-billion takeover bid for CanniMed Therapeutics Inc., and advised Nuuvera on a $826-million takeover offer from Aphria Inc. Revenues on those deals have yet to be booked.
The prospect of the coming federal legalization of recreational marijuana has fuelled booming interest from investors in the sector. Shares in public Canadian cannabis companies – which now number in the dozens – have soared, encouraging those firms to raise new equity capital and, in some cases, driving them to pursue mergers with rivals.
The capital markets arms of the major banks have largely stayed away from the sector, leaving an opening for smaller independent dealers to find revenue they lost when the last commodity boom went bust.
For Mr. Daviau and Canaccord, all of this adds up to a new-found confidence. Will the big banks try to eat into Canaccord's piece of the marijuana market?
"Quite frankly, we'd welcome it," he said. "They wouldn't stand a chance."
Canada's Big Six banks have largely avoided advising and financing cannabis companies. That's partly because many of them have sizable operations in the United States, where cannabis runs counter to federal law, but there are also concerns about the sector's volatility.
That's starting to change. Bank of Montreal became the first large lender to lead an equity financing for the sector in January by underwriting a $200-million share sale for Canopy Growth Corp. alongside GMP Capital Inc. – the first public statement that these large institutions may be encroaching.
Mr. Daviau doesn't see this as a threat to Canaccord, noting that "most of the money we've made in this sector is helping little companies grow to be very big companies, and we don't really perceive bank competition in that area." The large banks tend to focus on bigger clients, which is why they've been able to profit handsomely off an unusually high number of large equity underwritings and mergers and acquisitions in the past few years.
There is also a chance that the banks will make the marijuana market even bigger. Their encroachment "just adds further credibility to the sector, improves valuations, broadens distribution, all that kind of stuff," Mr. Daviau said.
The latest earnings also marked a rebound for Canaccord Genuity's Canadian investment banking arm. While the dealer has reported the odd strong quarter since commodity markets started to struggle, its bright spots were usually abroad. Last quarter, it was the dealer's domestic business that shone, with capital markets revenues here more than doubling to $75-million from a year prior.
Although Canaccord Genuity's profit has soared, investors remain skeptical of a short-lived rebound. The company's shares fell 5 per cent on Wednesday to $6.02. Their postfinancial-crisis peak is near $16 a share.
Canaccord Genuity's profit is also in better shape because of sharp cost cutting over the past few years, particularly on head count. The dealer has slashed one-third of its capital markets work force worldwide since fiscal 2012 – this after spending many years expanding outside of Canada. "We see no material need to grow our U.S. or U.K. capital markets business," Mr. Daviau said on the conference call.
The dealer has also seen continued strength from its wealth management operation in Britain, which it bolstered with the acquisition of Collins Stewart Hawkpoint for $400-million in 2011, as well as the purchase of Hargreave Hale Ltd. in 2017, a deal that added $13.5-billion in assets.
Net income from the global wealth management unit totalled $16-million last quarter, climbing 157 per cent from the same period a year prior.