Consolidation Expected in the Cannabis Industry
“We Don’t Need 100 Cannabis Companies,” Cannabis Industry Analyst Says
BNN Bloomberg is reporting that cannabis industry analysts are predicting “shareholder activism” and consolidation of companies. These come in the wake of several reports of “inadequate” corporate governance practices within the cannabis industry. The sheer number of companies within the cannabis industry seems to indicate consolidation is on the horizon.
“There’s [a large] amount of cannabis companies, when you line them up, from the TSX, the Venture, the CSE,” said Matt Bottomley, director of equity research at Canaccord Genuity Inc. “In Canada, we have three telecom companies, five or six banks, so we don’t need 100 cannabis companies.”
Much of the criticism will come from short-seller reports, Bottomley said. One of the highest profile examples happened in December when Quintessential Capital Management’s Gabriel Grego criticized Aprhia Inc. of overpaying on assets in Latin America. Aphria’s stock plummeted to $5.00 CDN on the TSE on the news, despite Aphria’s protests that it was essentially being attacked by a short seller. The stock recovered somewhat, closing at over $14 on February 5, 2019.
There have been other reports by stock analysts warning about Canadian companies being too aggressive in predicting cannabis profits. Some said that “100 per cent” of licensed producers in the cannabis industry need to improve how they disclose fair value.
Bottomley told BNN Bloomberg that it will be these types of reports that start driving stock prices within the cannabis industry. “There’s going to be winners and losers in this space and I think short-sellers’ reports could, down the road, put some spotlights on those,” he said.
(Incidentally, Quintessential Capital Management reportedly said that they are “moving on to other projects”. In the meantime, Aphria has rejected a hostile takeover bid from Green Growth and said its CEO Vic Neufeld is stepping down.)
Volatilty in Cannabis Industry Leads to Opportunities for Investors
Eric Foster specializes in the cannabis industry at Toronto-based Dentons law firm. He said that the volatility in the stock market compounded by interest from US investors makes for some good opportunities.
“There’s insane stock volatility,” Foster said. “When you have governance issues and companies whose financial results may not hit expectations or frankly [don’t make] that much money to justify their valuations, that’s going to draw attention from activists.”
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