AltaCorp’s Eight-Member Pot Team Is Primed for a Wave of Deals

(Bloomberg) -- AltaCorp Capital Inc. expects a wave of consolidation in Canada’s marijuana industry in the next few years and is building an eight-person team to take advantage of the coming deals.

The investment banking arm of ATB Financial Services, the largest Alberta-based financial institution, with assets of C$50 billion ($39 billion), expects to see stronger companies snapping up craft brands and investors demanding performance rather than slick sales pitches.

“The ones that have been talking a big game but haven’t really built a business behind it, they’ll fall away,” said Jeffrey Fallows, a managing director in investment banking and head of the firm’s agriculture & diversified industries business. “The ones that have the sustainable competitive advantage, that have the real brands, that have the real distribution partners, that have IP-differentiated products, those guys will rise to the top and those will be the big players of tomorrow.”

The sky-high valuations that many cannabis companies have enjoyed, simply by virtue of their involvement in the industry, will come under scrutiny by May 2019 as investors demand to see real earnings and cash flow, Fallows said in an interview in Calgary, where AltaCorp is based. In his role, Fallows is building the bank’s cannabis franchise in Toronto and features five bankers, one analyst, and two associates, one of which still needs to be hired.

Stronger Companies

AltaCorp joins other smaller investment banks including Canaccord Genuity Group Inc., GMP Capital Inc., Eight Capital and Clarus Securities in an industry that’s gained little attention so far from most of Canada’s largest lenders. Among Canada’s big banks, Bank of Montreal, Canadian Imperial Bank of Commerce and Laurentian Bank of Canada have made some initial forays into providing investment banking services including arranging financings and advising on takeovers.

Fallows said the coming deals may not be as frenzied as in recent years -- Canadian cannabis companies have been involved in at least 97 announced acquisitions with a combined value of $8.06 billion this year -- but it will produce stronger companies.

Here are his other thoughts on the fledgling industry as legalization approaches on Wednesday:

More on M&A

“Companies are going to identify holes that they have in their business plans that they didn’t know were there. As the market starts to shake out, they’re going to have to fill those holes. Some are going to fail on delivering their business model. There will be some fatal flaws that will come to light, but they will have assets that others want to buy. ”

“Big guys, as more craft brands start to develop, they’ll be buying those craft brands and bringing them in house, trying to establish that big player or the well-positioned, dominant player in the space for with longevity.”

Valuations

“Everyone’s going to get a pass in this quarter. There’ll be distribution issues, there’ll be outages. Next year though, volumes, and forecasts on those volumes, and growth month-over-month, those types of real metrics will be available.”

“If you’re not hitting numbers, you’re going to have to either be a fast talker or put out some real plans to fix problems quickly or you’re going to be faced with an aggressive downgrade in valuation.”

Usage Trends

Social acceptance will increase when cannabis is available in vape pens or edibles, he said.

“I don’t think the vast majority of people who are curious about cannabis or want to use cannabis are going to include it in a bud form. The delivery format is going to be tied with social acceptance.”

Older consumers “want to go into a pharmacy or a health-food store or somewhere they feel more comfortable. When that happens or when it’s available over the counter or in pharmacies, in more medical-focused products, I think that’s going to be a big driver.”

The Global Market

“Internationally, it’s going to go medical first. I don’t expect that the Canadian model is necessarily going to be what everybody follows.”

The Question That Remains

“The biggest question mark is social integration. How’s it going to fit into our lives, how are people going to use it? When are they going to use it?”

“Everyone sort of works off the same estimates, but really what is that market?”

“It certainly could be bigger than current estimates that are out there, but the question is what’s the timeframe? How long does it take for society to catch up?”

©2018 Bloomberg L.P.