An employee checks plants in the flowering room during a tour of the Sundial Growers Inc. marijuana cultivation facility in Olds, Alta., on Oct. 10, 2018.Jeff McIntosh/The Canadian Press
The recent explosive runup in Canadian cannabis stocks – triggered by the same forces behind GameStop Corp.’s meteoric rise – has unleashed a flood of money into a sector that had been largely starved of capital for more than a year, Bay Street dealmakers say.
“There’s been a lot of capital raising in the cannabis sector for the first six weeks of this year … and a lot of it has to do with what has been going on with stock prices,” said Steve Winokur, global head of cannabis investment banking at Canaccord Genuity Corp.
Mr. Winokur, a veteran dealmaker in the pot space, said he’s seeing companies that would not have wanted to raise money a year ago, either because of a lack of investor appetite or weak stock prices, now looking to issue equity. “Liquidity is there, stocks are going up and investor interest is heightened so they’re taking advantage of the opportunity.”
Indeed, a number of mid-sized cannabis companies have successfully raised money over the past few weeks.
Toronto-based Auxly Cannabis Group Inc. announced a bought-deal public offering last week, raising $20-million in the company’s first significant raise since last April. Cannabis retailers High Tide Inc. and Fire & Flower Holdings Corp. also raised $15-million respectively in February.
Sundial Growers , the Alberta-based licensed producer whose stock skyrocketed as much as 79 per cent last week after it became the subject of intense speculation on Reddit forum WallStreetBets, raised US$74.5-million in early February. On Tuesday it announced a $22-million investment in licensed producer Indiva Ltd. , based in London, Ont.
“It would have been hard for these companies to raise money or do deals if this was late 2019 into early 2020,” said Aaron Salz, principal and founder of Toronto-based Stoic Advisory, a boutique investment company focused primarily on cannabis deals. “There’s an excitement in the markets … liquidity has gone through the roof, and that benefits the small-caps too.”
Mr. Salz, however, said that the money pouring into the sector is not necessarily driven by “true, long-term investors” who want to park their cash in Canadian cannabis companies. “This is speculative. But if you’re a Canadian cannabis company looking to clean up your balance sheet, pay down debt, you’d be smart to take advantage of the current environment,” he added.
Andrew Wilder, partner at Torkin Manes LLP, which primarily handles deals in the cannabis retail sector, believes the recent market exuberance bodes particularly well for retailers such as High Tide and Fire & Flower to consolidate their ownership positions across Canada. “Every single pot shop sells the same thing for the same price. There will have to be more consolidation,” Mr. Wilder predicted.
Last week’s online buzz on Reddit sent shares of multiple Canadian cannabis companies on a roller-coaster ride. Tilray Inc. gained as much as 150 per cent before plummeting 50 per cent. It closed at US$34.63 Tuesday on the Nasdaq exchange. Aphria Inc. advanced as much as 40 per cent before losing most of that value by the end of last week. Its stock price closed at $27.50 on the TSX.
The surge in certain cannabis stocks had a ripple effect on the sector, with the share prices of most major marijuana companies rising over the course of last week. But putting aside short-term peaks and troughs, both American and Canadian cannabis stocks have been on an upward trajectory over the past three months, fuelled largely by the election of U.S. President Joe Biden and the Democrats taking control of the U.S. Senate.
“The overriding factor that started this new spate of excitement was Senate Majority Leader Chuck Schumer’s push to make marijuana reform a priority in the U.S.,” said Rami Chalabi, a partner at McCarthy Tetrault’s cannabis group. “Obviously that led to a renewed focus on the biggest domino to fall in cannabis, which is U.S. federal legalization,” he added.
The deluge of cannabis deals has been more pronounced south of the border over the past three months, both in terms of frequency and amount. In the midst of the social-media-fuelled stock runup last week, U.S. multistate operator Green Thumb Industries Inc. raised US$100-million through an investment by a single, unnamed institutional investor. Jushi Holdings., another U.S. multistate operator that is listed on Canada’s NEO Exchange, raised approximately $75-million on Feb. 12, in a deal led by Canaccord.
Mr. Chalabi said his group is anticipating more consolidation in the Canadian cannabis sector, specifically between companies that were not necessarily where they wanted to be from a balance-sheet and capital perspective that have recently been able to raise money on the public markets. “These discussions are happening on a more even playing field. In the past, companies were reluctant to go into a deal and sign off on a deal when they thought they were undervalued,” he said.
On Tuesday, Quebec cannabis firm HEXO Corp. , which had spent most of 2020 selling off cultivation assets, downsizing its operations and improving its cash position, announced a $235-million all-stock acquisition of New Brunswick-based Zenabis Ltd. , a mid-sized cannabis cultivator. This was the second major M&A transaction in the cannabis sector over the past two months, after the Aphria-Tilray merger was announced last December.
But Canaccord’s Mr. Winokur does not expect to see more of these types of deals between Canadian companies. “I don’t see a rush for consolidation of cultivation assets. I see Canadian LPs buying U.S. businesses, or brand and tech-related acquisitions,” he said.
While the speculative surge in pot stocks might have temporarily subsided this week, it is reminiscent of the era before legalization where equity raises and public offerings were commonplace, often leading companies to engage in unbridled spending. It’s a scenario Mr. Chalabi is concerned might repeat itself if this degree of investor excitement for the sector persists.
“Volatility can lead to a lot of focus on what, in part, led to the downfall of the industry – deals for the sake of deals,” he said.
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