Canadian cannabis companies on $2-billion capital-raising spree

LARGER FACILITIES

GEOFF ZOCHODNE Cannabis-related companies in Canada have raised more than $2 billion so far this year as they lock down financing needed to serve the country’s coming recreational pot market, according to New York-based Viridian Capital Advisors.

The funds have been earmarked for cultivation, retail and deal-making, among other uses, Viridian said.

“While the medical market is expected to continue to grow over the next several years, the size of the coming adult-use market is expected to far exceed that of the medical side,” said Harrison Phillips, vice president at Viridian. “Companies have been raising significant amounts of capital, primarily to increase capacity to satisfy the coming surge in expected demand.”

The Viridian Cannabis Deal Tracker’s tally covered deals completed as of the beginning of this month.

The capital was raised via 189 transactions, and exceeds by a significant margin the US$937.4 million that had been raised by the entire global legalized cannabis industry at this point of 2016.

The US$1.5775 billion raised in Canada also makes up more than half of the raised money tracked by Viridian this year in the legalized industry, which was a total of US$2.696 billion via 366 transactions.

Meanwhile, Viridian says there have been 78 mergers and acquisitions in Canada this year to date. There had been 85 deals both inside and outside Canada at this point last year, according to the tracker.

“Additionally, companies have continued to invest in larger facilities with more advanced technologies (LED lighting and automation for cultivation, more scientific and precise equipment for extraction, etc.), leading to increases in the average raise sizes,” Phillips said.

The deals come as cannabis companies are trying to grow their operations ahead of Canada’s planned legalization of recreational marijuana, slated for next July, and as consolidation is expected among producers in the sector.

Phillips said that there has been an increase in the number of strategic transactions between companies in the cannabis sector, the largest being the $245 million that U.S. beverage maker Constellation Brands Inc. paid earlier this year for a 9.9 per cent stake of Canopy Growth Corp., Canada’s largest licensed producer.

“Most of the capital raises completed by Canadian cannabis-related companies in 2017 have been private placements (whether brokered or non-brokered) or bought deals,” Phillips said. “However, we have also tracked some Series Seed, A, and B financings as well as prospectus offerings.”

Vaughan, Ont.’s, CannTrust Holdings Inc. announced at the end of November that it had closed a bought deal private placement worth $20 million. The company said it would use the funds to, among other things, expand its greenhouse in the Niagara area.

Markham, Ont.-based medical marijuana producer MedReleaf Corp. said last week that it had closed a previously announced bought deal offering that yielded approximately $60 million.

MedReleaf said that it planned on using the net profits from the share sale “to finance the acquisition and/or construction of additional cannabis production and manufacturing facilities in Canada as well as in other jurisdictions with federal legal cannabis markets,” among other objectives.

“We believe LEAF would most likely seek to acquire/ construct a new greenhouse facility in Canada (given recent industry trends), however we note the company could also deploy some cash on international opportunities,” GMP Securities analyst Martin Landry said in a note.

Phillips said they expect fundraising and M&A activity “to generally continue at current rates through the first half of 2018.”

“However, any developments related to the regulation and establishment of the coming adult-use market will likely influence the rate of capital markets activity, with positive, businessfriendly news accelerating activity and negative, business-hostile news decelerating activity,” he added.

Provincial governments are continuing to firm up their proposed retail systems for recreational cannabis. The provinces and Ottawa have also been hammering out the details of a proposed excise tax on cannabis.

“Following the launch of Canada’s adult-use market in July 2018, we expect to see a shift in activity,” Phillips said. “Regarding capital raises, we expect to see larger, more successful companies beginning to raise additional capital to further expand their capacities and footprints. Regarding M&A, we expect to see an acceleration in consolidation as operators seek economies of scale and synergies to remain competitive as the continued commoditization of cannabis reduces prices and margins.”