Corrected: RPT-Canada's maturing Big Weed hits up Europe hoping for expansion cash

East Side Games

13/09/2018 12:00

(Corrects Brendan Kennedy's title in paragraph 8)
    * Overseas institutional interest jumps for Tilray IPO
    * Europe seen becoming biggest market over next decade
    * Analysis shows retail investors still outweigh funds

    By Nichola Saminather and Simon Jessop
    TORONTO/LONDON, Sept 13 (Reuters) - A favorite of DIY stock
pickers, Canadian cannabis firms are trying to bolster their
institutional investor base by ramping up efforts to woo
European funds as countries across the region approve marijuana
for medical use.
    For some time companies including Canopy Growth  WEED.TO ,
Aurora Cannabis  ACB.TO  and Tilray Inc  TLRY.O  have been
signing export deals with European governments, buying local
companies, even opening production facilities in the region.
    This year, they have also stepped up pitching their
businesses to European funds at conferences and road shows,
betting their size and first-mover advantage will help replace
fickle retail investors with more stable institutions.
    Canada was one of the first countries to approve medical
marijuana in 2001, and legal recreational sales will begin in
October.  urn:newsml:reuters.com:*:nL1N1TM1QG
    Until now, though, Canadian firms have had little success in
drawing institutional investors because of high valuations
and lingering concerns about the future and legitimacy of the
industry - particularly in the United States.
    Executives say institutions are moving cautiously and
acknowledge it will take time before their efforts translate
into substantial investments, but cite some early results.
    For example, while Tilray's Nasdaq initial public offering
in July primarily went to North American investors, 12 percent
of the $153-million offer was taken up by funds from London,
Frankfurt, Sydney and Hong Kong.
    Brendan Kennedy, president and CEO of Tilray and executive
chairman of private-equity firm Privateer Holdings, which
remains Tilray's majority owner, said he met with more than 200
institutions, many in Europe, ahead of the listing.
    "Some of the investors who participated in the IPO, they
would've been unimaginable eight years ago, of course, but a
year ago as well," Kennedy told Reuters.
    One of those to take part, albeit with a symbolic stake, was
global investment house Fidelity International, which
bought around 0.15 percent of Tilray shares across several
funds.
    Canopy's latest financing deal, a C$500 million  ($384.44
million) convertible debt offering in June, was only pitched to
institutions and drew about 60, mostly new investors, with a
third coming from Europe, Chief Executive Bruce Linton told
Reuters.
    A significant shift towards a more institutional and diverse
investor base, however, has yet to happen.
    A Reuters analysis of publicly available shareholder data
shows Canopy has just four Europe-based active investors that
use a common long-term investing strategy, in contrast to 102
for Goldcorp  G.TO , a similarly valued Toronto-listed stock.
(Graphic: https://tmsnrt.rs/2PuJuX0)
    Still, investors, organisers and executives say this year's
events mark a step up both in turnout and a shift to
institutions compared with recent years when European
conferences would primarily draw retail investors.
    Michael Barnes, professor of neurological rehabilitation at
the University of Newcastle and chief medical officer at
Scythian Biosciences  SCYB.CD , said plans to relax rules later
this year in Britain, home to many of Europe's top investors,
could unlock institutional demand.
    "I think we're close to a tipping point."
    In February, Canadian financial services firm Canaccord
Genuity hosted Britain's first medical cannabis
conference in London aimed solely at investors and attended by
more than 100 fund managers, family office representatives and
wealthy individuals. Three months later, another
conference organised by advisory firm Prohibition Partners with
Canaccord as one of the lead sponsors drew 450 participants,
according to the organiser.
    "A couple of months in cannabis is like two years in most
industries," said Tristan Gervais, who leads Canaccord Genuity’s
cannabis investment banking and corporate broking in Britain and
Europe.
        
    DIFFERENT KIND OF CASH
    On the face of it, Canadian cannabis firms do not need cash.
In anticipation of a surge in sales after October and more 
medical marijuana approvals worldwide, the valuations of the
five biggest Canadian companies have soared to about C$43
billion, even though most have yet to turn a profit. Yet most
shares are held by retail investors, which brings price
volatility that complicates planning and expansion.
    "It's smart strategy to... bring in institutions who will be
with us as we expand," said Cam Battley, Aurora's chief
commercial officer.
    Aurora last year bought Pedanios, which supplies marijuana
to German pharmacies, and also operates in Denmark and Italy.
Canopy has operations and partnerships in Germany, Spain and
Denmark.
    For now, North American investors remain the main source of
institutional capital. 
    Despite a federal ban, the United States is also by far the
biggest legal market, accounting for almost 90 percent of the
$9.5 billion in global sales in 2017, according to research
firms Arcview Group and BDS Analytics. 
    But Europe, projected to become the world's largest medical
cannabis market by 2028, could become a key source of funding.
    Over 20 European countries allow medical marijuana,
providing incentives to invest in Canadian firms, which account
for the majority of operating licenses in Europe and about 70
percent of its imports, according to Prohibition Partners.
    The group predicts annual sales in Europe will reach 116
billion euros ($131.9 billion) by 2028, with growth of 40
percent a year.
    Prohibition Partners' founder Stephen Murphy said the
Cannabis Europa conference attracted alongside fund managers
also executives from sectors such as pharmaceuticals, healthcare
and insurance. urn:newsml:reuters.com:*:nL2N1Q52BF
    Constellation Brands  STZ.N , a U.S. producer and marketer
of beer, wine and spirits, set a high bar when it raised its
stake in Canopy by $4 billion in August.  urn:newsml:reuters.com:*:nL4N1V63SO 
    Among European investors to take their first step this
year is Felix Wintle, fund manager of the London-based
15-million-pound  ($19.54 million) VT Tyndall North American
Fund.
    Wintle said the fund had about 3 percent of its portfolio
invested in Canopy Growth and Tilray, though lofty valuations
made it tough to justify buying more.
    "It's a fascinating time for the sector because ... you're
coming off prohibition, basically," he said. "You don't often
get opportunities like this."
($1 = 0.7677 pounds)
($1 = 1.3006 Canadian dollars)

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Investors in Canadian cannabis producers IMG    https://tmsnrt.rs/2PuJuX0
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 (Reporting By Nichola Saminather in Toronto and Simon Jessop in
London; Additional reporting by Joshua Franklin in New York
Editing by Tomasz Janowski)
 ((Nichola.Saminather@thomsonreuters.com; +1-416-687-7604;))