The Canadian market has seen a surge in M&A activity since 2017 and it looks as though 2018 will follow suit. According to a PwC Canada 2018 M&A mid-year review, in the first half of 2018 alone, Canada hit CAD$93 billion in M&A activity and outbound deals increased by 8% as compared to the first half of 2017, largely due to a surge in cannabis sector deals. While we have noted this increase previously, recent legislative changes regarding cannabis warrant another look to determine the robustness of this trend. For example, in health-care, overall deal value and deal volume have increased by 233% and 48%, respectively, which is significant given that cannabis falls into this category.
More notably, the coming into force of the Cannabis Act on October 17, 2018, and the recent announcement of the Ontario government regarding the privatization of the cannabis industry, may explain current and future increases in M&A activity. Both of these developments have attracted excitement at the prospect of new opportunities. There have already been 48 cannabis deals in the first half of 2018, valued at CAD$5.2 billion, which demonstrates the magnitude of this opportunity. It is also being speculated that an increase in supply may force underfunded cannabis companies into bankruptcy or to exit the market, which would provide opportunities for better funded companies to acquire assets or merge in order to support growth.
The federal legalization of cannabis is far-reaching and everyone wants a piece of the pie. The government of Ontario recently announced on August 13, that it will follow suit and has plans to immediately introduce online retail channels for cannabis, which will be followed by a private retail model by April 1, 2019, all of which will aim to eliminate the illegal market for cannabis. The government of Ontario plans to work with private sector businesses to build a safe and reliable system for consumers. For instance, it is proposing to introduce Official Ontario Cannabis Retailer Seals to help consumers identify legitimate retailers where federally quality assured products can be found. This presents an opportunity to retailers to obtain such seals, thereby increasing their legitimacy and the value of their businesses, and to use this for growth and for leverage in M&A transactions.
This is a trend worth tracking. This is only the beginning of the impact of the legalization of Cannabis on M&A activity in Canada – there is much that remains to be seen.
The author would like to thank Saba Samanianpour, summer student, for her assistance in preparing this legal update.
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