In what is being hailed as a major shift in the Canadian marijuana landscape, the Bank of Montreal will take part in a $175 million financing deal (since upsized to more than $200-million) for Smiths Falls, Ontario’s Canopy Growth Corp, becoming the first chartered Canadian bank to lead a financing round for a pot company.
The move adds a further degree of legitimacy to the emerging industry, say business experts.
Stock prices for marijuana companies have been on a tear since last year, as companies continue to jockey for position in the lead-up to legalization of recreational marijuana, which the federal government promises will occur sometime this summer. And while investment in the space has been strong —the total market cap for Canada’s marijuana stocks is well over $15 billion, with many pot producers having already garnered funding rounds in the tens and even hundreds of millions of dollars— many still regard the marijuana sector as a high risk venture full of too many unknowns.
“The industry tells a rosy story of growth and opportunity,” writes Allan Gregory, professor of economics at Queen’s University, for MacLean’s magazine. “But I would suggest a careful recall of the dot com bubble offers a somber warning.”
But having BMO jump into the space could go a long way towards erasing some of those fears and encouraging more conservative investors to join the party. The deal is said to be co-underwritten by BMO and GMP Securities, which has been involved in big financing deals for marijuana companies in the past, and includes an agreement to purchase five million Canopy shares at a price of $34.60 per share (eight per cent lower than the company’s share price as Wednesday’s market close). Canopy says that it will be using the funds for capital expenditures and capacity expansion of its facilities.
“It’s my understanding that the book for the deal is north of $500 million, as the legitimacy of a bank is bringing new players into the space from the buy side,” says Andrew McCreath of BNN. “Fund companies that did not want to touch the space are now going to through purchase of these shares of this Canopy issue because a bank has decided to get involved.”
“It definitely brings a whole new life to the marijuana space in Canada,” he says.
A sticking point for BMO’s involvement was reportedly Canopy’s assurance that it would not be expanding its business to the United States, since on the federal level, at least, marijuana is still considered a Schedule 1 controlled substance.
BMO was “very grueling about the fact that they are not looking to work with companies that break American law,” said Canopy CEO Bruce Litton to the Globe and Mail.
Litton says the deal will make some hesitant investment institutions rethink their approach to the marijuana space. “I think this signals a new normal,” says Linton “What I think is going to happen is the institutional buyers who’ve said we don’t really do this because banks don’t do this are going to say ‘shoot, we really should do this.