The Canadian Press Business News has just declared Canada’s move to make recreational cannabis use the story of the year.
With the legalization sparking an entirely new industry and impacting nearly all facets of society, it is not surprising that the story got so much attention. Even though the word disruption has been used so much that it has now lost most its meaning, there is nothing that epitomizes disruption more than the legalization of cannabis, according to deputy business editor of the Toronto Star Andrew Meeson. The legalization has affected practically every facet of Canadian life from commerce, to politics, justice, health care, policing and even culture itself. With such profound impact, it is no wonder that the legalization would make the business story of the year.
The story was chosen as the best business story of the year when 60% of reporters and business editors cast their votes for cannabis legalization in annual poll administered by The Canadian Press. The story beat several big stories including the terse negotiations between Mexico, the US, and Canada for a renegotiated North American Free Trade Agreement that only managed 30% of the votes. The Canadian Keystone XL pipeline only garnered 10% of the vote despite the courts overturning its regulatory approval. The rescinding of the presidential permit in November, a few weeks after its regulatory approval was withdrawn was not enough to give the story any momentum in the voting. The pipelines were a big story and would have won the polling hands down had the legalization not spawned an entirely new industry. It is not every day that journalists get to report on the creation and growth of a new industry, and certainly not one that could ever be as controversial as cannabis.
Newfoundland and Labrador made history when it made the first legal sale of recreational marijuana a few moments past midnight on the 17th of October. The state was chosen as the pioneer of legal recreational cannabis as its timezone is 30 minutes ahead of all of Canada. The New York Times called the legalization Canada’s “national experiment” that was the result of years of work put in by law enforcement officials and legislators in all municipalities, territories, and provinces. Legalization has been planned for July but had to be postponed as licensed producers increased production to cater to what was sure to be increased demand. Nonetheless, customers that waited in long queues were forced to deal with the reality of widespread product shortages on launch day, as most online outlets ran out very fast, while the few brick and mortar stores that had licenses were hardly prepared to meet the demand.
Despite the difficulties of the first day, many Canadians were still excited to finally be able to legally buy recreational cannabis after nearly a century of prohibition. Many that had once fallen foul of the law were elated with the prime minister for pushing for the legislation. Nonetheless, in the buildup to the legalization, the excitement about cannabis had been building as retail investors rushed to buy stakes in the newest cannabis companies to go public. In the lead up to the 17th of October, many cannabis companies had their valuations rise exponentially with trading volumes on some of the online direct investment having record highs. The poster boy for the cannabis mania was Tilray Inc whose stock on the NASDAQ went as high as $300 USD, which meant that the value of its parent company Nanaimo, BC was at one time higher than the likes of Rogers Communications Inc. or Loblaw Companies Ltd, which are old established conglomerates. According to CBC News senior business writer Pete Evans, the cannabis investment mania will be looked upon as the point in time at which many Canadians got their first taste of investing. Praised or blamed, it will be remembered for getting the young generation interested enough to make their maiden stock market investments.
Investor interest was also driven by a lot of acquisition and merger activity in the burgeoning industry even before it was legalized. Aurora Cannabis went all out to acquire Cannimed Therapeutics for $1.1 billion in a bruising takeover deal before it turned around to buy Medreleaf for $3.2 billion. In August Constellation Brands the giant alcohol company announced that it was increasing its stake in Canopy Growth Corp. Its investment is the largest strategic outlay in the industry to date. The Corona beer producer also got warranties that would take its stake in the cannabis company to more than 50% if it decided to exercise its options. Big Tobacco has also been busy making investments in the space as more countries legalize medical marijuana. Altria Group, the maker of the Marlboro brand of cigarettes is planning to make 2.4 billion investment in Cronos Group Inc., which would give it a 45% stake in the pot producer. Just like the Canopy Growth Investment arrangement, Altria could exercise an option to increase its stake if it so wished.
There was a slight lift in the market when the Altria Cronos deal was announced though cannabis stocks are overall down from their record highs, as the reality of the true value of the companies began to set in. Short sellers have also come into the market in force targeting Canadian marijuana companies. Two short sellers went in hard for Leamington, Ontario based cannabis producer, Aphria Inc. making allegations that most of its recent acquisitions were not worth much. Under a relentless barrage of these attacks, the stock of the company fell by more than a half in just three days. Aphria maintained that the allegations were misleading and inaccurate, though it set up an independent review board to vet the claims even as it went ahead with the deals that were questioned.
In the meantime, the industry is yet to find a solution for the chronic supply shortages. Supply chain issues have been blamed for the shortage, though the producers have been quoted asserting that they intend to ramp up production to ease the problem. While this is good news, the new product will not be hitting the market any time soon and hence the problem will persist for quite some time. Most corporation stores in Quebec do not operate from Monday through Wednesday because of the shortage. Ontario also has its own problems as there are no retail franchises that have been licensed leaving the residents with only the government-run portal as the only way to legally purchase cannabis. However, with the government making a promise to issue more retail licenses, there should be an easing of the shortage in the coming days. Still, the Ontario government is offering just 25 licenses through April, which will be issued through a lottery system. The decision to cap the number of licenses will come as a huge disappointment to many companies that had already leased prime real estate in preparation for selling recreational cannabis. These may now have to take huge loses if they do not get hold of one of the 25 licenses on offer.
Cannabis has come from the peripheries of society to become an overnight success. It has been quite a fascinating journey for the cannabis industry as it defied all obstacles on the way to legalization. However, it remains to be seen how the expectations of the industry live up to the vagaries of the real world.