Although recreational sales of cannabis will not begin north of the border until July, Canada’s financial and M&A firms – both big and small – are already warming up to the Canadian cannabiz.
In the past, because the larger institutions saw the industry as too risky, much of the action had been led by small independent brokers. However, recent moves by the larger institutions are beginning to take large chunks of market share.
Data from Thomson Reuters of Canada shows that over the course of 2017, equity offerings by Canadian cannabis companies tripled to a record high surpassing $1 billion, with nearly two-thirds of that coming in the final quarter. Meanwhile, some Candian cannabiz stocks have surged as much as 110 percent just since November.
According to Financial Post Data, Canadian financial institutions helped to raise well over $1.5 billion in 2017 spread over 56 deals – some of which were blockbusters. Twenty-two of those deals were made by Canaccord Genuity Corp. which raised nearly $719 million.
Graham Saunders, head of capital markets at Canaccord Genuity Group Inc., one of the biggest underwriters of cannabis deals in Canada, and underwriter of an IPO for Cannabis Strategies, called it “a very busy year for financings in the cannabis sector.”
In one of the biggest deals of the year, Canada’s largest licensed producer of medical marijuana, Canopy Growth Corp., based in Smiths Falls, Ont., set up a deal worth just under $200 million with U.S. alcoholic beverage giant Constellation Brands Inc., a Fortune 500 company that markets Corona beer. The deal went through in October.
According to FinancialPost.com, Canopy sought the advice on the deal from INFOR. Neil Selfe, the CEO and managing principal for INFOR, spoke with the publication about the deal, saying, “We realized that it was going to be hugely meaningful for the sector.”
At the time the deal began to surface, there were few institutional investors willing to become embroiled in the marijuana industry, but Selfe points out that “Having a global leading brand company come in and invest $250 million [Canadian dollars], after having conducted the extensive due diligence they had, we knew would be a real … endorsement, not just for Canopy and its strategy, but for the space overall.”
Selfe’s company did advise Canopy on the deal. “And we unequivocally said ‘if you can make that deal work, from a financial standpoint, it is such a game-changer that you have to do it,” he said.
Mergers and acquisitions group, Stikeman Elliott LLP also became interested in the space at that time putting together a $135-million initial public offering for Cannabis Strategies Acquisition Corp., which was formed specifically to buy marijuana-related businesses.
Simon Romano, a partner in the firm told FincialPost, that this is the kind of opportunity that could “create a global champion or two, adding that there is a “remarkable interest in people not wanting to get left behind in this race to legalization… Some people will make money and some people will lose money in the next two, three years, I would expect. But right now, it’s just fear of missing out.”
Unlike in the US where cannabis is Federally illegal, Canadian banks, including Canadian Imperial Bank of Commerce and Farm Credit Canada, extended Markham, Ont.-based MedReleaf Corp. a $20-million credit line.
2018 is already heating up for Canadian cannabiz
There has also been an equity offering from Canopy Growth and an issue of convertible debentures by Aurora Cannabis so far in 2018.
In mid-January, BMO Capital Markets helped Canopy Growth raise $161.3 million. And just recently, Bank of Montreal joined other underwriters in a share sale by Canopy potentially worth $230.8 million.
In January of this year, after months of negotiations which turned from hostile to friendly, Alberta-based Aurora Cannabis Inc. made a deal worth $1.1 billion for Saskatoon’s CanniMed Therapeutics Inc.
Smaller firms had a head start
The smaller brokers, having gotten into the game before the big players were ready to move (they saw the industry as too risky), have a headstart in banking relationships and researching marijuana companies.
According to CNBC, although the big institutions are gobbling up businesses, it could result in smaller brokers such as Canaccord Genuity Group seeing a jump in revenue as well.
“The smaller independent brokers are fairly opportunistic and good at jumping on trends, so crazed market activity in anything to do with cryptocurrency and marijuana plays right into that ability,” Matt Skipp, president of SW8 Asset Management, told CNBC.
“Obviously there is a healthy market here for companies that raise money,” said Vahan Ajamian, an equity research analyst covering the cannabis sector at Beacon Securities. “I don’t see that shrinking anytime soon.”
The future of Canadian cannabiz finance
When the county’s plans to legalize pot for recreational use launches in mid-2018, Canda will be the first G7 country to legalize cannabis, and the only second in the world after Uruguay.
As the list of Canadian companies and investors focusing on cannabis continues to grow, no one can say how many of Canada’s biggest banks will get involved.
“We don’t see any changes in the momentum of either activity,” said Canaccord Genuity Group Inc.’s Graham Saunders.
With all these deals going on, and both larger and smaller banks and brokers getting involved, the stage is being set for an explosion of interest in financing deals, mergers, and acquisitions of Canadian cannabis companies in the future.