GONE TO POT
Inside Canada’s trailblazing, taboo-breaking, billionaire-making sprint to legalization, as told by the people who made it happen
Tony Dean, Senator And I volunteered to be the sponsor. We started with ‘What’s the problem the government’s trying to address?’ Simple question. Heavy rates of youth consumption, comparatively. A drug that we know is harmful if used intensively and frequently by young people. A $6 to $8 billion illegal market that we’re all ignoring. And ongoing criminalization that was having an effect on people’s lives. Those are each really big issues that were being ignored before this bill was introduced. And they each demanded a very close and careful look. Trina Fraser, lawyer, Brazeau
Seller Law The Senate’s approach to C-45 certainly got people nervous for a few minutes. They were like, ‘Well wait a second. No, no. They should just pass the bill. Just pass the bill!’ And then (the Senate) started to say, ‘No, no, no, we’re not going to just pass the bill. We’re going to do what we think is in the best interests of Canadians and we want 40-some amendments to this bill.’ I had people calling, talking to me everyday ‘What does this mean? Are they going to back down?’ Deepak Anand, consultant, Cannabis Compliance Inc.
(The big moment) was that Senate vote. Trina Fraser and I were at a party in Toronto, and actually we were listening to the vote on our smartphones out in the park.
Tony Dean The galleries were full and there was a little bit of electricity in the air. I can tell you that there were some people in my group who made up their minds hours before that final vote. They were on the bubble. They were still asking questions. Bruce Linton, CEO of Canopy
Growth The media kept calling me and making me think that it was close. The media scared me, even though I thought on my own this process is going to work out. But you get 12 calls a day so you think, ‘God, maybe I misread this.’ And it wasn’t even close.
Deepak Anand We were literally counting the number of people that had said ‘Yea’ versus ‘Nay.’ Right at the end of that vote, there was this gasp. At one point, it was like ‘Well, did the vote go horribly wrong? Did we not win?’ But it had gone through.
Bill Blair We’d gone to the provinces and territories and said, ‘How much time do you need to implement after Royal Assent?’ They had said, ‘Between eight and 12 weeks.’ But it was a very intense eight and 12 weeks. We decided in order to help them be successful, we’d give them 17 weeks, and so the date of Oct. 17 was set.
‘YOU CAN’T GROW IN A GREENHOUSE’
Building a business is never easy, but building an industry virtually from scratch in less than two years is almost unprecedented. Licensed producers faced endless challenges in the race to scale up, while the provinces also scrambled to set up their cannabis sales regimes. Things didn’t always go smoothly. And not everyone was happy with the results.
Bruce Linton This sector has had a nearly continuous case of hiccups for five or six years because there’s a lot of friction involved in doing something that changes perception, public policy, creates an entirely new supply chain, doesn’t have generally good access to banking, all of a sudden becomes international.
Vic Neufeld It’s not an easy thing to build a greenhouse and know you can produce, you know, 20,000 kilos a month. It takes a lot of experience, a lot of knowledge. And Mother Nature is not cooperative at all times.
Bruce Linton People said, ‘You can’t grow in a greenhouse, that won’t work, greenhouses are too easy to break into because they are glass,’ all these complaints. So I didn’t know how big the company or the sector would be, but I knew our objective — it wasn’t to be small, it was to be No. 1.
Greg Engel, CEO of OrganiGram You have to be very creative and work with the right companies to help build and find solutions. And a lot of those solutions, you’ve had to create custom, such as preroll equipment that’s going to produce millions of pre-rolls (pre-rolled joints) per year. I mean, no one out of the U.S. had that expertise, and we’ve had to go to engineering/design/manufacturing companies to create that equipment.
Brian Harriman, CEO, New Brunswick Liquor Corp. We knew supply was going to be critical. We knew from our experience that we could build buildings and hire people and train them and do all those good things, but doing all that and having empty shelves wasn’t going to work.
At that point, we didn’t have the mandate to run the stores. But we thought, ‘No matter who’s running retail stores in New Brunswick, they’ll need supply.’ So we began signing supply MOUs in July 2017. One of the challenges was we, as the New Brunswick Liquor Corporation, couldn’t sign supply contracts with a cannabis producer given that it was still illegal. So there was some stickhandling there to think about who did have the authority to sign. At the end of the day, the province was the entity that had to sign the documents and to support the process.
Bruce Linton I feel as a Canadian taxpayer, we should be very proud of how the bureaucrats have conducted themselves. If this was done in any other country there would probably be an awful lot of bribery. If it was done in any other country, the bureaucratic capabilities wouldn’t last and the outcome wouldn’t work. There’s a reason why 25 countries have come to say, ‘Hey, how are you doing this here?’
Brian Harriman We had 6,000 people apply to work for us. We screened through to 2,000, interviewed 800 and hired 330 people. But from the 2,000 to 330 job offers going out was done in four weeks. So it’s been a pretty mammoth task.
Sebastien St. Louis, CEO of HEXO When the legislation was announced, we were extremely concerned with the ramp-up and execution of our medical business. And then when (recreational) came on, and the size of the opportunity, it required a restructuring. Medical is just dried cannabis, and eventually they introduced oil. But now we need to start to think about food. We need to start to think of cannabis as an ingredient. We need to start to think about the branding opportunities. How do we put in an enterprise resource planning system and seed-to-sale tracking for recreational? And how are we going to do the age verification?
Brian Harriman A lot of times we’ve been at a crossroads and been forced to make a decision without knowing what the final federal regulation was going to state. As we were designing our stores and we were looking at security within our stores, there was no federal guideline. Can we just leave it on a shelf somewhere? Do we need
it locked in a cage? Does it need to be in a vault? So we erred on the side of caution and every one of our cannabis stores has a vault in the back for product. Jodie Emery, cannabis legalization activist The last two years for me, have been nothing but seeing big business and big government trying to eliminate and harm the pioneers and the entrepreneurs who actually built the industry. It was very scary being sidelined, and basically the government at every level, they are saying to us, ‘You’re going to be locked out of the legal system, you can’t afford to get in, and your criminal record will ban you, and you’ll get locked up.’ We had war declared against us.
THE ART OF THE DEAL
For Canada’s investment bankers, cannabis has been the gift that keeps on giving, unleashing a steady stream of IPOs, takeovers and financings. Last October, U.S. alcohol giant Constellation Brands Inc. upended the sector with a $245-million investment in Canopy Growth, putting Canada’s cannabis industry on the international map. Then there was the three-way takeover dance that saw Aurora Cannabis snatch up CanniMed Therapeutics for $1.1 billion in March, leaving Newstrike Brands Ltd. out in the cold. But nothing could match Constellation’s second planned investment in Canopy, a staggering $5 billion, which reset valuations in the sector and set off a flood of speculation as to who might come calling next.
Steve Ottaway, Investment Banker, GMP Securities We did the largest IPO in the space at the time (2017), which was MedReleaf. That was a $100-million IPO. And that was pivotal, because we saw people coming into the book like JP Morgan. And then you’re just shocked, because you’re realizing, ‘Wow, this phenomenon is really starting to take off. People are looking at this as a real investment.’
Jamie Nagy, M&A Banker, Canaccord Genuity Group Inc. The pace of the deals moves very quickly. One of the analogies I like to use is the industry is in dog years. Everything is going so fast. And issuers don’t want to waste time on, ultimately, deals that won’t happen.
Bruce Linton So the hardest deal was the first Constellation one for the $245 million. Because none of us needed to do that deal. Capital markets loved us, they loved them, but it took a lot of working around. Eleven months. So that one was tiring but fun. But people said to me, ‘It’s a change of control.’ Well, when the banks weren’t giving you any money, what do you do?
Vic Neufeld (Constellation’s entry) led to significant appetite and significant interest from many industry leaders in different spaces. For example beverages, whether it’s the recovery drinks, it’s
utility drinks, it’s beer, it’s wine, it’s alcohol, you’re going to get tobacco very interested now, you’re going to get the agricultural guys like Monsanto interested, they are all coming forward with a degree of interest, curiosity and how they can leverage their respective brands and their consumer profile.
Cam Battley, COO of Aurora Cannabis So the first thing is, if I ever have togo through a hostile takeover again, it will be too soon. It’s a very difficult and emotionally challenging process. Because you’re in a fight, and it’s a very high stakes fight, and you have to win and it’s as simple as that. Once you launch that hostile bid, you can’t go back. I remember that day. It happened very fast, and we made a very informed but very rapid decision that we were going to do it. You’ll remember that it was the shareholders representing 39 per cent of CanniMed who came to us and indicated that they felt it was necessary to change the management of the company in order to maximize the potential of CanniMed. And we made a decision over the course of five days to make that bid. Nobody got any sleep. In quarterbacking that hostile bid, I don’t think I got more than five hours of sleep for four months and it was seven days a week of work.
Deepak Anand The $5 billion that Constellation put into Canopy Growth sent signals to everybody that this is a mainstream industry. Clearly, the stock markets reacted very positively at the time. But it wasn’t just about the markets. I was thinking that, all right, people are now looking at our industry very seriously. That was a pivotal moment.
Bruce Linton What I really don’t understand about stock markets — well a lot of things — but if one company is doing a bunch of stuff right, and has all the money, which means they have a balance sheet to execute and everybody else doesn’t, why does everyone else’s value go up?
Greg Engel We’ve seen two big shifts happen in the space. One is, we continue to see kind of larger, what may have been more traditional large funds, come in. And I think one of the key things that drove that was when Bank of Montreal came into the space as the first major Canadian bank to come in. I think that signalled to the market that, OK, this is a large, growing, legitimate, global industry that could be based out of Canada. And the other is we’ve seen investor interest in the U.S. grow dramatically.
Vic Neufeld Let me just say, some companies (within the cannabis space) need to acquire. They need to acquire because fundamentally they don’t have the strength necessary to be industry leaders. Acquisitions are strategic, but I can suggest to you that some acquisitions are to cover up shortcomings and they are buying these companies at extreme premium prices because they know others have the building blocks that they don’t have.
MORE HIGHS THAN LOWS
Big banks and institutional money may have been slow to warm to cannabis companies, but the prospect of getting rich off a once illicit substance was too much for the public to resist. The past year saw cannabis stocks turn into one of the biggest retail investing manias since the dot-com boom. While there were ups and downs, nothing could have prepared investors for the final act, the stunning rise of Tilray Inc., which saw its shares soar 17 times in value in the two months following its July IPO — much of it in a dramatic few days in September.
Chuck Rifici, CEO of Auxly Cannabis, and co-founder of Canopy I knew the industry would get this large eventually, but I remember talking to our first investors, pitching them back in 2013, and I said you know, within five years, there would be a billion dollar cannabis company. I never thought there would be a dozen of them, that we would see a few $10 billion companies. The industry has grown at least three times faster than I expected.
Bruce Linton We became the first publicly traded legal marijuana company ever (in 2014). And that was kinda neat. And people got too excited — we came out and the stock went up. And then there was about eight to 10 months where I got emails from investors saying, ‘Look, you are an idiot, the company is not properly run, you should be profitable, not using shareholders money. Why did I invest in this company?’
Aaron Salz, consultant, Stoic Advisory I’m surprised at how quickly this became a mainstream investment and how fast the investment banks and investors and mainstream financial media like CNBC have jumped on this. I can’t believe how quickly this has become so massive and mainstream. Every day it is shocking me.
Steve Ottaway The volatility has been stunning at times in the space. The market goes through these various swings. And when we see these run-ups, a lot of the time it’s on the basis that there’s something coming, about to happen. That can drive the market. Or, you just have the market suddenly deciding it’s overvalued. On each one of these times, I’ve often sat back and thought ‘OK, well, the market seems to be dead.’ And then all of a sudden, it’s not. Just to give a more poignant example In mid-August, all the stocks were dropping. And it looked really nasty. And we’re kind of staring at our screens going, ‘All right, this is not good.’ And then Constellation hit.
Chuck Rifici Well, I saw (Tilray) as a supply-demand issue on a stock level. There’s only three main companies listed on the big U.S. exchanges, and because Privateer (Privateer Holdings, a U.S. private equity firm) owns so much of the stock, there was very little float, so it was almost a perfect storm of having a run up. So I feel — I’m shocked, actually. I was surprised by the fact that there was so much volume. That’s not just retail investors, that’s institutional capital, that despite the valuations feel that they need, that they must have, in my view, have exposure to the cannabis industry. Aaron Salz I mean (Tilray) was the second-most traded stock in the entire world by dollar volume. The only company that traded more in dollar volume was Amazon. To me it was not a good thing, I was not happy that day — I think it was all the wrong attention on the industry. Jodie Emery This is the white-washing and corporatization of cannabis. I call it the grass ceiling. These people are not in the business of pot, they are in the business of stock. I call it the Great Liberal Legalization Pot Stock Scam. It’s deeply distressing to see all these big businessmen, former politicians, former law enforcement, premiers, prime ministers, making tons of millions of dollars on pot stock. Chuck Rifici I very publicly sold all of my Canopy stock in 2015. I sold it for about $5 — that’s not public info but I’ve told enough people. I did very well, it’s just that you hate when, you know, you’re the one who sold. And certainly, you know, every time it doubles, I’m probably not productive that day.
THE END OF THE TABOO
October 17 will be a historic day, but the story of legalization is not over yet. Regulations around edibles and other cannabis products still need to be ironed out. Companies will have to execute on their grand plans to meet the country’s demand for marijuana. And the public will have to decide if the experiment has been worth it. One thing all those involved in the sector agree on The months ahead will be full of surprises.
Tony Dean When I was 17 years old growing up in Birmingham in the U.K., there was a lot of cannabis around, as there is today. I saw a newspaper headline one day that said something like ‘Canada to legalize cannabis.’ That was in 1971 or ’72. And that’s the first time that I saw a reference to cannabis being legalized in Canada and I said to my friends at the time, ‘Ah, that’s never gonna happen.’
Bill Blair We will have the day in which the law comes into effect. But I’d remind everybody this is still part of a process. And it’ ll take some time for the provinces to open their retail outlets. That’s fine. They’re doing it carefully and cautiously. It’ ll take time for some of the municipalities to put their regulatory frameworks in place. I know some of the employers, even the police, are making determinations about the usage among their own people. That’s part of the process. We’re working through this together.
Aaron Salz I think the next 12 months are going to be marked by delays, production overruns and budgetary challenges, and so to me, that’s normal course, but I’m wondering how does the public interpret that, and how negatively do they interpret that? Most investors expect that recreational is going to just cause hockeystick growth in revenue and massive cash flows but if you look at the nuts and bolts of what the prices they are getting, it’s not going to be like that, at least not in the first year.
Bruce Linton I have no real competition except public perception, public policy and the illicit market. Those are my three competitors. If you have an unstable political environment, public policy and public perception can be played one way or another. So these things sometimes create anxiety for me.
Chuck Rifici I think the biggest challenge will be the prohibited advertising space. I would say the rank and file licensed producer has no idea what they are walking into. It is very much, almost a cut and paste of the Tobacco Act, like it’s 90 per cent tobacco advertising controls versus alcohol. Vic Neufeld We are all going to have short-term supply chain issues. I’ve been communicating this for several months now leading up to Oct. 17.
Cam Battley Legalization in Canada is a victory for activists and advocates. They fought and they sacrificed for decades to first force the Supreme Court to force the federal government to create a medical access system. That was a critical step in reducing the stigma. I’m a suit, I didn’t come into the sector with a full appreciation of how right the activists were in what they did for cannabis. We owe them a lot. We need to make sure there’s a role for them in the legitimate industry.
Bill Blair I’ ll tell you what a number of people said to me ‘You spent so much of your life in the enforcement of the law, this is such a change for you.’ And I said, ‘No it’s not.’ In fact, what I spent most of my life doing, I was in the public safety business — in the business of keeping communities safe, fighting organized crime and protecting kids. This was entirely consistent for me. Done right, this can actually create a safer environment and that’s the job, that’s always been the job for me.
Chuck Rifici It does feel so surreal. I think it’s going to be a real stark moment when you see people smoking joints where you see people smoking a cigarette. And instantly, you’re going to get people saying, ‘Wow, it’s here.’ It’s going to create a very visual image for Canadians that will remove the taboo.