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Is there an ROI for LPs M&As?

It’s been a big year for consolidation among the biggest players in Canada’s cannabis industry, but efforts to grow market share and revenues through M&A have not been fruitful so far, reports the Globe and Mail. 

‘Just making bets’

A refresher: Aphria and Tilray merged, Quebec’s HEXO dropped more than $700 million for three producers, Zenabis, 48North and Redecan, and Canopy Growth snapped up Ace Valley and Supreme Cannabis for $485 million. But many are still reporting declines in revenue, are shuttering cultivation facilities and laying off workers.

“I don’t think any of these companies have solved the puzzle yet of how to build and maintain market share,” said Stoic Advisory’s Aaron Salz. “Some of these large companies are just making bets, in desperation almost, to buy producers that have gained a consumer base very quickly. But all of a sudden, someone comes along with a better product and consumers just move on.”

The case of Canopy Growth

Canopy’s revenue has been shrinking for three straight quarters (from $152 million in December 2020 to $131 million in September 2021). That’s including revenue generated by new acquisitions Ace Valley and Supreme, which they acquired for $51.8 million and $435 million respectively, which they said would “unlock revenue growth opportunities.” 

But in the last three months, Canopy’s market share has dropped from 8.7 to 8.2 per cent. Ace Valley’s has dropped by 8 per cent, and Supreme’s has dropped by 9 per cent.

Eyes on the US

The reasons for the declines could be due to shifting consumer appetites as new cultivators enter the space and the challenge of managing multiple brands under the same umbrella. But is Canopy’s recent US acquisition of Colorado’s Wana or Tilray’s MedMen purchase similarly doomed? 

“I am not sure I would describe these deals as bad,” said Andrew Wilder, a partner at Torkin Manes. “Companies were motivated to buy for two reasons: to build brand awareness, which is important, and to find a way to enter the American market.”

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