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Marijuana industry is gripped by deal mania, according to PwC



Excitement around Canada’s
marijuana industry is high.

Photo/Matilde Campodonico

  • Major Canadian marijuana
    cultivators, or LPs, are on a
  • All that excitement around the industry will create
    winners and losers, according to a new report from
  • The winners, according to the accounting and consulting
    firm, will have “laser-focused” strategies looking at long-term

The cannabis sector is booming.

Major Canadian marijuana cultivators, known as licensed producers
(LPs), have pursued a flurry of deals as excitement around
legal marijuana market
ramps up.

Earlier this week, Constellation Brands, the beer-and-liquor
giant behind Corona, poured close to
$4 billion
into Canopy Growth, the largest publicly traded
LP. In May, Aurora — another of Canada’s large LPs — bought a
smaller rival, Medreleaf, in a
$2.3 billion
stock deal, just days after the company closed a
$1 billion cash-and-stock acquisition of
CanniMed Therapeutics. That’s amid a wave of smaller mergers
and acquisitions in the sector. 

Though investors are excited about the prospects of cannabis
legalization, accounting giant PwC is flashing warning signs: the
“deal mania” in the cannabis sector will create some winners, but
many more losers.

The winners are going to be the firms that are “laser-focused” on
long-term growth, PwC said in its recently-published “Cannabis
in Canada
” series.

Flowering marijuana plants are pictured at the Canopy Growth Corporation facility in Smiths Falls, Ontario, Canada, January 4, 2018.  Picture taken January 4, 2018.  REUTERS/Chris Wattie
marijuana plants are pictured at the Canopy Growth Corporation
facility in Smiths Falls


Don’t chase ‘opportunistic events’

PwC said investor fervor has led LP’s to “move in too many
directions at once” by boosting the production of
 investing in
export markets
with ambiguous regulation, and developing new
consumer-focused brands for products in which there may not yet
be a clear market.

For example, Canadian LPs are rushing to create products like
edibles, beverages, and vaporizer oils, though most Canadian
provinces have said those products won’t be allowed until the
middle of 2019 at the earliest.

“To succeed in this rapidly evolving industry, companies
will need to grasp the realities of the marketplace and quickly
enact a focused, disciplined plan of attack,” PwC

Canadian LPs are all seeking to have the first-mover
advantage when new export markets open up. But as governments
around the world debate the merits of legal marijuana, it’s
likely that some LPs will find themselves ramping up production
to meet a demand that doesn’t yet exist — both in Canada, and in
export markets — causing prices to drop across the board as both
Canadian provinces and other countries deliberate how to
implement legalized marijuana.

“The risk here is that too many Canadian LPs are trying to
become global corporations before they have established
sustainable domestic businesses, opening the door to
complications down the road,” PwC said. 

On top of that, investors are more closely scrutinizing the
financials of publicly traded LPs as valuations soar. Once
legalization begins in Canada, consumers will have a range of
options, and will likely gravitate towards brands they

“Investors will show little patience for companies that
cannot differentiate themselves to win in a crowded market,” PwC

To win the market, PwC said LPs should chart a plan to grow
sustainability over three-to-five years, rather than targeting
“opportunistic events” that could give the stock price a quick

“Significant investment has been made in cannabis companies
and in order to move away from aspiration and into reality,
companies must now combine a coherent strategy built upon
conscious, well-articulated decisions with flawless execution,”
PwC said.

Read more of our cannabis industry coverage:

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