June 28, 2022

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Canada’s Weed Lead Is Running Out of Puff

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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 read more . 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 for pot companies have come down; Ontario-based Canopy Growth (WEED.TO) recently pushed back its profitability expectations ; 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 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.

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