The cannabis industry has been awash in paper and it’s not just the rolling kind.

Mergers and acquisitions in the cannabis industry this year have been primarily conducted using only shares, according to data provided by Dealogic. In the year to date, 69 per cent of all pot sector deals where there’s a change of control have been financed entirely with stock, the data show. Meanwhile, 30 per cent of transactions used a mix of cash and stock, while only one per cent of deals in the cannabis space have been funded entirely with cash.   

“Cash is king in our industry,” said Paul Rosen, chief executive of Tidal Royalty Corp. and a board member of iAnthus Capital Holdings Inc., which used its equity to finance a recently announced US$835 million all-stock takeover of MPX Bioceutical Corp.

“We’re trying to protect our balance sheets. Once you have gone public, our stock is a good alternative to cash which we could use more effectively,” he added in an interview with BNN Bloomberg.

The cannabis industry’s use of stock contrasts to global M&A activity where takeovers financed with shares have accounted for 17 per cent of transactions this year, while cash is used 54 per cent of the time, Dealogic found. A mix of cash and shares has been used in about 28 per cent of takeover deals this year, the data concluded.

Cannabis takeover activity ramped up this year as investors flooded into the sector before Canada legalized recreational use of the drug last month. Of the more than US$7.5 billion spent in cannabis-specific M&A over the past five years, US$5.3 billion took place in 2018 alone, according to the Dealogic data.  

Some of the more notable pot deals made over the past year that used stock as currency include Aurora Cannabis Inc.’s takeover of MedRelief Corp. for US$2.1 billion in May, the largest purchase completed to date in the industry; and MedMen Enterprises Inc.’s acquisition of PharmaCann LLC for US$682 million last month.

Steve Ottaway, managing director of investment banking at GMP Securities LP, said cannabis companies often have a hard time raising debt which has resulted in more stock being used to complete any deals in the sector.

“If you have any sort of capital on your balance sheet, you want to use it for driving business rather than buying someone else,” Ottaway told BNN Bloomberg in an interview. “Nobody wants to give up their capital. They all want to use cash as a war chest.”

But the pot industry’s valuation levels -- as well as the relative immaturity of the market -- have led many to describe it as the next gold rush, or more recently, as the next “dot-com bubble,” said Richard Leblanc, a professor of governance, law and ethics at York University.

“It’s almost like a feeding frenzy right now. It’s really hypercompetitive because people believe this is a way to get rich,” Leblanc said in an interview with BNN Bloomberg. 

The amount of deals completed using just stock should be a significant cause for concern for investors when eyeing the space, said Ryan Lewenza, senior vice president at Turner Investments LP, a Toronto-based fund manager with $600 million in assets under management.

“As an investor, the primary concern in investing in the cannabis space is nosebleed valuations and being late to the party,” Lewenza told BNN Bloomberg in an interview. “But as these pot companies buy more of these other companies, the bulk of these deals are likely to be dumb acquisitions. We just won’t know how they’ll turn out for a few more years.”

Leblanc estimates that it will take between three to five years until cannabis companies produce enough revenue that can be deployed for M&A and also help justify their market valuations.  

“All bets are off until you get a solid revenue stream and some certainty in the space,” he said.

For Rosen, these all-stock deals also make sense from a business perspective. Giving an executive stock in exchange for their company comes with certain lock-in periods and targets to hit, keeping the incentive to stick around and make sure the newly merged company does well.

“Everyone needs a good reason to persevere in the years that follow an acquisition,” Rosen noted.

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.