Consolidation is Coming

CONSOLIDATION NATION CONSOLIDATION IS COMING

By Bryan Borzykowski

It won’t be long before business’s biggest players try to score a budding cannabis business.

Over the last couple of years, the Canadian cannabis sector has seen its fair share of takeovers, but it’s mostly been larger companies, like Canopy Growth or Aurora Cannabis, buying smaller players. On August 13, though, the M&A game changed when Constellation Brands, a massive Victor, New York– based alcohol company, sunk $4 billion into Canopy in exchange for a 38% share of the pot producer — upping its existing 10% stake — and an option to one day take full control.

Jon S. Godfrey

It was the biggest marijuana-related deal made by a non-cannabis company to date, but it won’t be the last. With Molson Coors Canada sniffing around the sector — it entered into a joint venture with Hydropothecary Corporation to produce cannabis-infused drinks in August — and other big companies keeping a watchful eye on where the industry may be headed, expect many more mergers and acquisitions post-legalization. “The industry is going to look a lot different in a few years,” says Mark Whitmore, vice-chair and managing partner with Deloitte Private. “We’ll have a few big players buying up companies.”

UP FOR GRABS

Every operation in Canada is a potential takeover target, but who does the buying will depend on what companies have to offer. At first, the sector will start consolidating, with bigger producers buying the smaller ones that can’t compete, says Whitmore. As demand picks up, many companies will find it difficult to scale. Bigger companies will then buy those businesses and incorporate their production facilities, their technology or their people into their own operations. Some niche players, companies with products, services or tech that others can’t replicate, will stick around, but most will get bought. “More than 100 licenses to produce have been given out, but we’re not going to need 100-plus producers,” he says.

It’s when other countries legalize cannabis and when more information about the Canadian market becomes available, such as demand and profit potential, that far bigger companies will come around, says Scott Willis, head of research for Grizzle, an investment research firm that studies cannabis companies. While many industries could benefit from adding a cannabis company to their portfolio, businesses in the alcohol, tobacco and pharmaceutical sectors will likely be the most eager to buy.

BUYING GROWTH

Those first two sectors need cannabis, says Willis. The beverage industry is worried that people will drink less and smoke more, while big tobacco needs a product to offset declining cigarette sales. “They need a place to find growth,” he says. These businesses will be looking for operations for existing brands that have some market share and they’ll want to see which products are in the pipeline, he says. “Beer companies know distribution and markets, but they don’t have any products,” he says.

Pharmaceutical companies are looking to buy businesses with promising patents and clinical trials. If a company has a patent on, say, a new pill delivery mechanism, or if the business owns medical-related data that a drug company would want, they’ll buy in. They’re not interested in getting into production, he says, but they are interested in working with companies who can produce product in the same way every day. “They might want to buy into an oil company that can create the same thing every time,” says Willis. “They like to know what they’re getting.”

TIME TO CASH OUT?

While some cannabis companies will want to try and make a go of things, many others will be more than happy to cash out. If you do want to attract suitors, though, you’ll need to give them what they want. “It comes down to whether you have something of interest to other players,” says Whitmore.

What that is depends on your business. Maybe you have a popular brand of flower, a proprietary technology that can help grow plants faster, an experienced executive team that has a track record of success, or a top-of-the-line production facility, and so on. “A buyer will do an analysis and say, ‘Can I build that team or brand or process on my own?’” says Whitmore. “If it’s faster for them to buy it then they may be willing to pay a premium for it.”

Now’s the time to get your pitch ready, because once legalization happens, buyers may start knocking on your door. “As more countries, especially in the G7, start looking at this, we’ll see more companies and institutional investors get in,” says Whitmore. “The big guys will come in and say, I’d rather buy it now than build it on my own.”