Marijuana industry is gripped by deal mania, according to PwC

Excitement around Canada’s
marijuana industry is high.
AP
Photo/Matilde Campodonico

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

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The cannabis sector is booming.

Major Canadian marijuana cultivators, known as licensed producers
(LPs), have pursued a flurry of deals as excitement around
Canada’s
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
Thomson
Reuters

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
marijuana, 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
said. 

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
trust.

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

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
boost.

“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.