Mergers in Canada’s Cannabis Industry Ahead of Legalization

April 11, 2017- Canada is set to detail its plans for legalized recreational marijuana, with the industry expecting a rush of mergers as companies seek a national footprint amid a patchwork of different rules in each province.

Prime Minister Justin Trudeau’s government will unveil its proposed law as early as this week but is likely to leave many facets — potentially including distribution and the legal age — up to individual provinces, as recommended by a federal panel. That suggests Canada’s pot market could be similar to its ad-hoc system of restrictions on the sale and shipment of alcohol.

The development may spark further consolidation as companies seek to expand their geographic footprint as the shape of the market becomes clear. Shares of marijuana companies like Canopy Growth Corp. have surged more than fourfold over the past 12 months amid investor optimism over recreational sales, which Canaccord Genuity Group Inc. said in November could reach C$6 billion ($4.5 billion) annually by 2021. Pot entrepreneurs have also turned to Canadian equity markets to raise funds for U.S. operations.

“There will be some M&A activity,” said Cam Battley, executive vice president of Aurora Cannabis Inc., a licensed marijuana producer in Alberta. “I think you anticipate there will be rapid building of capacity.”

That will come as the government warns of a long road ahead developing regulations with provinces and cities once it introduces its proposed legislation. “There’s a clear recognition we’ve got a lot of work to do,” Bill Blair, the federal lawmaker and former police chief leading Trudeau’s legalization effort, said in an interview. Both he and Bardish Chagger, the government house leader, declined to comment on if the law would come this week, the last before a two-week parliamentary break. The Canadian Broadcasting Corp. reported Monday the law would be unveiled Thursday.

Companies may seek acquisitions across multiple provinces to hedge against the risk jurisdictions will implement the legislation in different ways or at different times, according to Daniel Pearlstein, a research analyst at Toronto-based brokerage Eight Capital. The rollout will take time as provinces still need to decide how marijuana will be distributed, he said, noting municipalities may have oversight of licensed storefronts.

Smith Falls, Ontario-based Canopy, the first Canadian company with a market value of C$1 billion — making it a marijuana unicorn — announced last week it will expand west by acquiring closely held rTrees Producers Ltd. in Yorkton, Saskatchewan.

Aurora Cannabis, which has a production facility north of Calgary and is building an 800,000 square-foot facility at the Edmonton International Airport, acquired Peloton Pharmaceuticals Inc., a late-stage marijuana producer applicant in Montreal.

“Ultimately there might be a handful of big players remaining so I think we assume there’s going to be a fair amount of consolidation along the way,” Pearlstein said.

Battley echoed that prediction, noting there’s good access to capital in the sector. Clear timelines give companies confidence to expand, he added, noting Aurora plans to boost production to 100,000 kilograms per year from 5,500 kilograms when its Edmonton facility is complete. “We are going to be opportunistic,” he said.

Canopy’s strategy is to keep building infrastructure to ensure they don’t run out of product and the company has two staffers that do nothing but review expansion and acquisition opportunities, according its chief executive officer. The firm, which also has a footprint in Quebec, will “probably do one more location to get a little further west,” Bruce Linton said by phone Monday.

Even with a patchwork system, the legalization of recreational marijuana will vault Canada ahead of the U.S., where individual states have legalized for medical and recreational use but where federal law still bars the substance — constraining companies’ ability to produce and market it broadly.

Once the federal law is in place, talks on regulations — the nuts and bolts of the rules — will ramp up with provinces and cities. A recent report by public broadcaster CBC said the government would unveil the law this week and wanted to legalize by July 1, 2018, which is a national holiday commemorating the founding of the nation. Blair said the government wouldn’t necessarily enact the legislation on that exact date because “Canada Day is Canada Day,” describing it instead as an aspirational target “that’s a reasonable thing to aim for.” The government has committed to releasing the proposed legislation this spring.

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