The pot industry hasn’t experienced the global takeover wave many investors were hoping for—and probably won’t for the foreseeable future.
Next month, Canada lifts restrictions on cannabis-infused food and drinks, one year after it legalized sales of the dried plant. This is an important milestone for the industry and should generate an additional $2 billion in annual sales in Canada, according to Deloitte estimates. Higher-margin products could also help cannabis companies to become profitable, and diversify away from the crop itself where prices per gram are falling.
If cannabis-infused candy and drinks are a hit with consumers, that in theory makes Canada’s pot companies more attractive takeover targets. In practice, though, global brands have good reasons to stay away.
The biggest barrier remains the U.S. federal ban on the drug, which raises reputation and legal risks for global companies. Even in Canada, though, strict rules about how cannabis companies can package and promote their goods are a problem. Billboard ads, sponsorship deals and celebrity endorsements are all outlawed, and products must carry a government warning. That makes it almost impossible to develop memorable consumer brands.
Big companies that did invest early also look to have acted too hastily. In addition to a souring bet on e-cigarette brand Juul Labs, tobacco giant
has taken a paper loss of almost 20% on its $1.8 billion investment in Canadian cannabis grower
in which brewer Constellation Brands bought a 36% stake, has lost half its market value within the past year.
Inconclusive data about how cannabis consumption affects drinking means liquor giants like Jameson whiskey owner
feel little urgency to do defensive deals yet. One study by the Distilled Spirits Council of the U.S. found that sales of liquor in Colorado have increased by 7.6% per capita since recreational marijuana was legalized in the state. Smaller upticks were also found in Washington and Oregon, where adults are allowed to use pot.
Global consumer companies still are watching the cannabis industry. If they do get involved, it is likely to be through small minority stakes taken by their venture-capital arms rather than multibillion-dollar takeovers. Research partnerships, as Budweiser’s owner
has with Canadian pot grower
are another low-risk option.
Bullish investors may have their reasons for paying up to 13 times projected sales for shares in cannabis companies like Canopy Growth. But hopes that big brands will buy them out shouldn’t be one of them.
Write to Carol Ryan at firstname.lastname@example.org
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Source: WSJ.com: Markets