5 big ways M&A activity will impact the Canadian cannabis market

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Big changes have been taking place in the Canadian cannabis market and among them is a significant increase in M&A activity. Within the first six months of 2018 alone[1], 48 deals took place, representing a total value of CAD$5.2 billion. It stands to reason, with recreational legalization on the horizon and Canadian cannabis stocks skyrocketing left and right, companies are using the ample capital available to ensure their scalability, as they move into a brand new expansive market.

From this increase in M&A activity, a number of trends have risen. The Zeifmans’ Cannabis Team, sees these trends as belonging to five major categories:

1) Cannabis companies investing in new cannabis business opportunities
The red tape and uphill application process to acquire cannabis licencing has left many smaller organizations facing challenges with inventory, space for production, and financing issues.  Acquisitions increase production capacity, better preparing a company to meet the demand of the recreational market post-legalization. Perfect examples include the $3.2 billion deal[2] that just closed when Aurora Cannabis Inc. purchased MedReleaf Corp. or Auxly Cannabis Group Inc.’s recent acquisition of  leading Canadian contract research organization KGK Science Inc. for $12.3 million[3].

2) Cross-pollination
Recreational legalization has been proven to negatively impact alcohol sales – in some cases resulting in a 15%[4] decrease. With the potential for lost revenue on the horizon, many alcohol companies have begun new ventures with cannabis producers. Most notably, Molson Coors Brewing Co. recently announced a joint venture with The Hydropothecary Corporation to develop non-alcoholic cannabis-infused beverages. Similarly, Constellation Brands (known for big players in the alcohol industry like Corona) recently invested $5 billion into Canopy Growth Corp. (“Canopy”), increasing their equity stake to approximately 38% of Canopy, with the ultimate goal of Canopy becoming the number one global cannabis leader.

3) Consolidation
In Canada, legalization will span the entire country, and relatively uniform regulatory guidelines throughout, consolidation is expected to steeply increase. This is generally believed to be good for consumers; when larger businesses compete, prices remain competitive, operations increase in their sophistication, and the quality of the product rises. For comparison purposes, it is widely believed[5] that a lack of consolidation in Colorado’s legal recreational market can be traced back to the hesitance of investors, given that in the US, Cannabis remains a Schedule 1 Narcotic at the Federal level.

4) International alliances
As we’ve discussed in a previous article[6], the opportunity for cross-border deals in the Cannabis industry is poised to further expand the industry. Several deals between Israeli and Canadian-owned cannabis companies have begun to take shape, as well as American companies seeking to enter the Canadian retail market. Recently, U.S. owned Medicine Man Technologies Inc. announced an exclusive licensing agreement[7] with Canada House Wellness Group that will allow for their products to be sold north of the border. As the Canadian recreational market grows, we’ll surely be seeing more international M&A deals.

5) Craft market expansion
At least initially in the Canadian recreational market, the strains most readily available for purchase will be grown by the largest licensed producers, who previously only grew for medicinal purposes.  They’re the companies with the greatest financial backing, and thus, the ability to jump through the many hoops required to gain retail access at this point. However, industry experts believe[8] that as the general recreational cannabis consumer develops a more complex palette, the demand for micro-cultivators (producers operating under less than 2,000 square feet of canopy space) will steeply increase. Though the verdict is still out on how the “little guys” will be able to compete against the industry giants, we believe the trend toward local, artisan cannabis will follow in the footsteps of the food and alcohol markets.

How Zeifmans can help
As global thought leaders in the cannabis accounting sphere, the team at Zeifmans has an unmatched level of industry knowledge pertaining to the unique needs of Canadian cannabis companies. As a member of the Nexia International, our expertise spans over 650 offices across 115 countries worldwide. Known for our commitment to Canadian small businesses, we offer accounting, auditing, governance, tax, advisory, and corporate finance support within a long-term, relationship-based setting.

For more information, reach out to Jennifer Chasson, Larry Zeifman or Robert Grunwald, members of the Zeifmans Cannabis team, by contacting our office at 416.256.4000, or send us an email at info@zeifmans.ca.

[1] Cision, “Canadian M&A Activity Hits $93B in First Half of 2018”, https://www.newswire.ca/news-releases/canadian-ma-activity-hits-93b-in-the-first-half-of-2018-689892131.html

[2] Yahoo Finance, “Canopy Growth CEO: ‘We’re going to make anything and everything that’s lawful’”, https://ca.finance.yahoo.com/news/canopy-growth-ceo-going-make-anything-everything-thats-lawful-110013523.html

[3] Globe Newswire, “Auxly Announces Acquisition of Leading Canadian Contract Research Organization KGK Science”, https://globenewswire.com/news-release/2018/08/21/1554395/0/en/Auxly-Announces-Acquisition-of-Leading-Canadian-Contract-Research-Organization-KGK-Science.html

[4] Pot Network, “These Are the Top 5 Beverage Companies Investing in Cannabis”, https://www.potnetwork.com/news/these-are-top-5-beverage-companies-investing-cannabis

[5] Marijuana Business Daily, “Chart: How Much Consolidation Awaits Colorado’s Retail Marijuana Market”, https://mjbizdaily.com/chart-how-much-consolidation-awaits-colorados-retail-marijuana-market/

[6] Zeifmans.ca, “Cannabis Finance: The Canada-Israel Link”, https://www.zeifmans.ca/news/cannabis-finance-the-canada-israel-link/

[7] New Cannabis Ventures, “Medicine Man Technologies Licenses IP in Canada for $4.65 Million in Cash and Stock”, https://www.newcannabisventures.com/medicine-man-technologies-licenses-ip-in-canada-for-4-65-million-in-cash-and-stock/

[8] CBC, “First Comes Legal Cannabis. Then, Say Industry Insiders, Will Come the Artisan Stuff”, https://www.cbc.ca/news/canada/edmonton/alberta-cannabis-industry-craft-growers-1.4758573