MORE ‘DISINTEGRATION’ THAN CONSOLIDATION
Canopy boss predicts survival of the fittest type of battle in sector
TORONTO The head of leading Canadian pot producer Canopy Growth Corp. sees the cannabis industry as ripe for “disintegration,” rather than just consolidation.
Bruce Linton, chairman and cochief executive of Canopy, outlined the somewhat apocalyptic-sounding vision for the future of the business Thursday morning, a day after his company announced they were part of the biggest deal yet in the marijuana industry.
“I get asked all the time, ‘Is there going to be consolidation?’ I think there’s going to be disintegration,” Linton said during a fireside chat at a cannabis conference in Toronto.
“Disintegrationhappenswhen people make promises at valu- ations that can’t possibly be fulfilled, because they have no offtake agreements, they have no chance of doing anything potentially other than building inventory and probably a third of the money that’s being doled out isn’t actually ever going to turn into any inventory.
“And the reason is, like, it doesn’t always work.”
The comments come as cannabis producers are ramping up their operations ahead of Canada’s planned legalization of the drug on Oct. 17.
A cash-crunch seems an unlikely problem now for Smiths Falls, Ont.-based Canopy.
Linton’s remarks followed Wednesday’s announcement that U.S.-based alcoholic beverage company Constellation Brands Inc. intended to up their ownership stake in Canopy to around 38 per cent — investing approximately $5 billion more in the pot producer to do so.
As part of the proposed transaction, Constellation would also receive warrants that, if exercised, could allow the beer maker to buy, ultimately, up to about 55 per cent of Canopy.
The massive capital infusion seemed to fit with the vision of the future of the industry that Linton laid out.
The Canopy chief predicted there would be a “Google-like” company in the space, and then a battle to establish the rest of the pecking order.
After that, however, there would be a “What were they thinking?” category, according to his analysis.
“If you think a whole bunch of other people might fall on their face,” Linton added, “you’re quite a lot better off to have capital, because you’re actually, potentially, going to be hurt by their trip, even if you didn’t trip.”
Constellation’s investment in Canopy is “the largest to date in the cannabis space,” according to the two companies, and the funds are aimed at building Canopy into the world’s preeminent marijuana company.
“Canopy appears to have the undisputed leadership position in the global cannabis industry, which warrants a valuation premium vs. peers in our view,” noted GMP Securities analyst Martin Landry.
And while a bit more critical about the deal’s risk to Constellation, a Morgan Stanley note said Thursday that the alcohol giant “is essentially buying an expensive upfront call option into an entity that is likely well positioned as a leading player (with a solid CEO Bruce Linton in our minds) in the potentially sizable cannabis market.”
Linton was much sought-after Thursday at the MJBizConINT’L conference in Toronto.
Not only did he have the fireside chat with a reporter from Marijuana Business Daily, but he also held forth for about an hour with a scrum of media, business people and conference attendees.
As he took questions from the cluster of people around him, Linton was asked for several selfies, and was even given a green-andwhite “Toronto Marijuana Leafs” jersey at one point.
He also discussed options for deploying the capital received from Constellation, after saying Wednesday that Canopy had more than $1 billion in international and non-cultivation assets on its potential shopping list.
Linton noted on Thursday that Canopy’s plans depend on geography. For example, the company has said it “remains committed to not entering the U.S. market in any manner that would contravene U.S. federal laws”.
Linton also gave the hypothetical of a “down-on-their-luck” biotech company as a possible acquisition target.
“Maybe I buy one of those, because then I don’t share my margins with somebody that I could just buy, as an example.”