More bad news ahead for Canada’s cannabis sector
Hunker down LPs
Happy 4th anniversary, Canada. We are lucky to live in the only G20 country with four years of a functioning market under its belt. Yet, our industry remains challenged by onerous regulations, taxation and mismanagement in many places. Year 5 won’t bring any relief. In fact, conditions are about to get more turbulent for LPs.
Operators and investors should pay attention to these 3 developments and adjust their plans accordingly:
1. Accelerated LP Consolidation
Increasing bankruptcies will be the prime driver of consolidation. The resilience and cash reserves of many players will finally come to an end due to a lack of profitability and available, low-cost capital. Just this past week, Flower One Holdings and Flowr Corp sought creditor protection. Some CCRA filings will be a tactical step to relieve their balance sheets, but most won’t be. I won’t name names but pundits expect 1-2 large LPs to implode. Divestments (e.g., CGC jettisoning Tokyo Smoke) and culled product portfolios will be wise strategies for many in these difficult times.
On the M&A front, some hurting companies will merge just to survive or to give long suffering shareholders an exit. For the lucky ones who find mates (recently, BZAM and TGOD), a marriage may just prolong the agony, not create stronger entities. There are still too many LPs (around 920), too many entrants and too much capacity. Some cannabis players with the resources and savviness can be acquisitors, but these will be strategically-minded bargain hunters.
2. Legal, investor & regulatory blowback
The Cannabis industry is a poster child for poor governance, dashed investor expectations and malfeasance. Expect activist shareholders and regulators to finally lose patience and legally go after the worst perpetrators and most underperforming companies (it already started with CannTrust, and recently Cronos). Furthermore, hedge funds lurk in the shadows ready to pounce on overvalued and mismanaged firms. Expect some pubcos will be delisted from exchanges for different reasons. Others should consider going private and minimize their compliance costs and scrutiny.
3. Government missing in action
The Feds are presently undertaking a mandatory review of the Cannabis Act. They are paying lip service to industry issues including a limited public consultation. However, don’t expect much relief on major industry issues for political and bureaucratic reasons - or any reforms in 2023. The one exception could be a decrease in the back-breaking excise tax burden. This could be reduced in the next federal budget in April 2023. Finally, most sectors of the Canadian economy are dominated by oligopolists. A cynic (or a realist) might see the federal government implicitly encouraging the emergence of a cannabis oligopoly. It sure looks that way.
#cannabis #canada #anniversary #M&A #regulations #cannabisindustry