The COVID-19 cannabis bounce-back has been a welcome respite in the storm that wreaked major havoc on the cannabis industry for most of 2019 and early 2020. But in many cases the damage was irrevocably done to company valuation and revenue streams.
Thus, cannabis LPs, cultivators, and retailers had to come up with creative solutions to get the multi-billion dollar industry back on track. New,
cheaper methods of growing, product
price reductions to fight the illicit market, and cutting out the proverbial
middleman have helped streamlined operations and helped get back on the road to profit.
But in some instances, the road to recovery can only be achieved by big initiatives that require big capital. That’s why mergers and acquisitions are sometime that last resort for failing companies sinking in a sea of red.
As
reported yesterday on Stockhouse, and through a BNN Bloomberg story,
Aphria Inc. (
TSX.APHA) and
Aurora Cannabis (
TSX.ACB) recently held “advanced talks” to merge the two Canadian cannabis LPs in what would have been a blockbuster deal, but the discussions broke down late last week.
The two companies opted to step back from merger discussions that took place over several weeks after failing to agree on board composition and compensation for some senior executives, the people told the new source under the condition of anonymity.
The winds of change were beginning to swirl as of late last year. The struggling cannabis sector was already into its third quarter of record losses and it was becoming obvious that a tsunami of large and mid-sized mergers was about to take place in 2020. The telltale signs were easy to spot – as growth capital goes up in smoke, stock prices decline, and cannabis LPs report lower-than-expected sales. It was the rule, not the exception, for the industry as a whole.
With the investor euphoria in 2018 and early 2019 for market share gains began to give way to the cruel realities of constructing profitable businesses, more companies have and will turn to mergers to conserve cash and survive.
"We've had six months of zero wind in the sector," lamented Bruce Linton, the flamboyant former CEO of Canopy Growth Corp. and still a leading industry figure. The market for new listings – always an important indicator of investor interest and confidence – was "crushed," as many previously announced stock mergers in the sector were being renegotiated or terminated, he said.
One of the biggest industry M&As to date occurred on April 19, 2019 – the mega deal between Canopy Growth Corp. (
TSX.WEED) and Acreage Holdings Inc. T.WEED announced it had acquired the right to buy the U.S. cannabis operator for USD$3.4 billion. It was an expensive buy, to say the least, and it’s been a rough ride for Canopy ever since.
A ride that the former CEO, Bruce Linton, could not have predicted during the halcyon days of T.WEED when it’ closing price was $56.89 on October 15, 2018.
In
January 2020, Cresco Labs
(CSE:CL) finally closed its deal to acquire Origin House for $1.1 billion. The announcement which was, at the time, the largest acquisition of a public company operating in the American cannabis industry to date, in a friendly, all-stock transaction.
M&As are nothing new to the cannabis sector, as we have seen substantial consolidation to date here in Canada. The first merger among publicly-traded LPs was T.WEED’s acquisition of Bedrocan Cannabis in late 2015, when the company was then known as Tweed Marijuana. Canopy Growth followed that acquisition in early 2017, buying Mettrum, and it added Hiku Brands in 2018. Seemed Bruce Linton liked to buy big green expensive things.
As we look ahead to the second half of 2020, the cannabis marketplace is ripe for significant consolidation and the vertical metrics the industry has recently experienced is likely only the beginning. In Canada, the number of LPs exceeds 140 – there are now 168 licenses, but several companies hold multiple licenses. To date, there are over 50 publicly-traded companies – most listed in Canada or dual listed – but some listed only in the U.S. – and this is likely too many. While several of these companies will likely fade away over time as they are unable to compete and ultimately to justify their valuations, it is likely that we will see continued consolidation in the cannabis sector.
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