Canada’s weed lead is running out of puff

Green Thumb Industries

21/12/2021 14:43

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Sharon Lam
    TORONTO, Dec 21 (Reuters Breakingviews) - Canada often has
little choice but to bend to the heftier market forces of its
neighbor to the south. The cannabis business was an exception
after Ottawa legalized weed in 2018 and gave Canadian companies
a lead. They've been angling for a stake in the larger U.S.
market. But they need to act soon to make the most of the
remaining early legalization buzz.
    There were about $2 billion in cannabis sales in Canada in
2020, according to Bernstein analysts. That pales beside $17.5
billion in legal sales in the United States, where pot remains
illegal at the federal level. Even without a change in that
situation, Bernstein expects the American market will be worth
some $40 billion a year by 2026.
    The introduction in November by Republicans in Washington's
House of Representatives of legislation to decriminalize
marijuana is one move that has lit up still higher hopes
 urn:newsml:reuters.com:*:nL1N2S628P. But there's already enough at stake to encourage
multistate operators – or MSOs – like Green Thumb Industries
 GTII.CD  and Cresco Labs  CL.CD  to ramp up production capacity
and strengthen their balance sheets.
    Meanwhile the high after Canada legalized the business is
fading. Unrealistic heady valuations https://www.breakingviews.com/considered-view/cannabis-is-like-bitcoin-only-with-revenue
 for pot companies have come down; Ontario-based Canopy Growth
 WEED.TO  recently pushed back its profitability expectations
 urn:newsml:reuters.com:*:nL4N2RW2NG; Hexo  HEXO.TO  and others have slashed their
workforces. 
    And they are running out of time. Valuation multiples
relative to revenue are still higher for Canada's operators,
roughly in line with technology names like Meta Platforms  FB.O 
and Netflix  NFLX.O , despite the bigger potential upside of
legalization to the south and what Bank of Montreal reckons is a
more profitable U.S. operating model given MSOs’ ability to
vertically integrate, among other things. That suggests that
even if the feds don't make marijuana fully legal, the
differential may not last.
    Canadian purveyors with the merger munchies need to find
their targets before then. One structure that is being used is a
kind of option on federal action. Canopy Growth boss David
Klein, for instance, shelled out https://www.newswire.ca/news-releases/canopy-growth-announces-plan-to-acquire-wana-brands-the-1-cannabis-edibles-brand-in-north-america-874227593.html
 nearly $300 million in October for the right to acquire
Colorado-based edibles maker Wana if the United States makes pot
legal, after striking a similar deal with Acreage. There's risk
in committing capital upfront,  but the moment may pass if
Canadian firms don't grab it.
    Follow @sharonlamhk https://twitter.com/sharonlamhk on
Twitter
    
    CONTEXT NEWS
    - Canadian cannabis company Canopy Growth on Oct. 14 said
that it had secured the right to acquire Colorado-based cannabis
edibles company Wana for $298 million, upon federal legalization
of marijuana in the United States.   

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 (Editing by Richard Beales and Amanda Gomez)
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