It's game on for the Canadian cannabis industry.
Hours after Aphria Inc. and Tilray Inc. formally announced their blockbuster merger that would create a global cannabis powerhouse, some cannabis producer CEOs received a deluge of messages from several Canadian investment bankers wondering if they'd be interested in a deal of their own.
"The phone is ringing off the hook," said one cannabis producer CEO who declined to be named given the discussions with the bankers are preliminary.
"You can see the writing on the wall. I've heard from at least four bankers this morning if I'd be interested in any deals."
The Aphria-Tilray merger, which will see a "new" Tilray emerge with a market capitalization of $5 billion and annual revenue of about $900 million, is set to catalyze a somewhat dormant cannabis industry in Canada that has been caught up in myriad losses due to overestimating consumer demand, overspending on production assets, and lower quality products.
“Consolidation was needed in this industry. In Canada, there’s over 500 [licensed producers] and with that, it needed a company to take a leadership role,” Irwin Simon, chief executive officer and chair of Aphria, said in an interview Wednesday.
Simon's partner in the deal, Tilray CEO Brendan Kennedy, is also surprised that there haven't been more mergers or acquisitions - or bankruptcies - in the cannabis sector this year, he told BNN Bloomberg in a phone interview.
But he added the new Tilray will be able to help stabilize an industry that has experienced rampant volatility over the past two years with no expected production facility closures as well as the ability to distribute its products across a retail network that should triple to more than 3,000 outlets in the coming years.
"If you think about the demands on a company to not only ship one type of product to 2,500 retail stores in Canada but all of the different products from different types of flowers, price points, different brands, different edibles, beverages, and oil. It's complicated," he said.
"I think you need scale to get your brand in all the remote retail locations. And that scale is needed to deal with the complexity."
Once the deal closes, the new Tilray is expected to hold nearly one-fifth of the Canadian recreational market, resulting in a formidable competitor to companies like Canopy Growth Corp. and Cronos Group Inc., as well as creating an "existential threat" to smaller producers, said Raymond James analyst Rahul Sarugaser in a note to clients on Wednesday.
"Given this shift in the balance of power, we expect to see a building wave of consolidation among large and small cannabis players alike," Sarugaser said.
Graeme Kreindler, an analyst at Eight Capital, expects that as the Canadian cannabis market matures, roughly a handful of companies will control between 70 per cent to 90 per cent of the market. While that isn't expected to happen for several years, he does see the Aphria-Tilray deal spurring a continued trend of consolidation within the sector.
"I think [companies are] going to be looking at this merger and assessing what the strategy is on a go-forward basis to be competitive," Kreindler said in an interview on BNN Bloomberg on Wednesday.
"If companies weren't thinking about it before, perhaps this has accelerated their thought process a bit as companies continue to get matched up with one another."
Cannabis Canada is BNN Bloomberg’s in-depth series exploring the ongoing growth of the Canadian recreational cannabis industry. Read more here and subscribe to our Cannabis Canada newsletter to have the latest news delivered directly to your inbox every week.
Advertisement