Cannabis market is consolidating, says Raymond James

ATB Capital Markets has been assessing the lay of the land in Canadian cannabis recently, with analyst Frederico Gomes saying in an October 19 report that the long-awaited period of consolidation could finally be underway. Gomes pointed to the recent merger announcement between The Green Organic Dutchman (The Green Organic Dutchman Stock Quote, Charts, News, Analysts, Financials CSE:TGOD) and private company BZAM Holdings as fresh evidence.

TGOD announced last week a definitive share exchange agreement with BZAM, where TGOD would acquire all issued and outstanding common shares of BZAM in exchange for common shares of TGOD, which would put the current BZAM shareholder as a 49.5 per cent owner of TGOD shares.

TGOD said the move would create currently the sixth-largest Canadian cannabis company, based on June to August 2022 retail sales. The company said TGOD generated $30.2 million in net revenue in calendar 2021 compared to BZAM at $32.2 million, while the combined entity would have had pro forma net revenue for the 12 months leading to September 2022 of $85.7 million.

On the merger, TGOD said it would combine its presence in Ontario and Quebec with BZAM’s operations in Western Canada. TGOD CEO and interim CFO Sean Bovingdon said in an October 19 press release, “Our highly complementary businesses in terms of production footprints, products and distribution networks create a Combined Entity with a leading branded product portfolio along with significant synergies across our operations.”

In his cannabis industry report, Gomes estimated the merger as implying a multiple of about 1.6x 2021 sales, which would put it in-line with the trading multiples of small cap licensed producers (LPs) in the cannabis space. Gomes noted that prior to the merger, BZAM ranked seventh nationally on flower sales and TGOD ranked ninth, with BZAM’s ranking of fourth in vapes showing a strong presence in that category.

On a wider picture, Gomes said the deal could signal a change in the winds around consolidation in the still-emerging pot sector. Gomes said structural forces such as minimal product differentiation, low barriers to entry and challenging regulatory environments have brought about today’s market fragmentation, but that could be about to change.

“We believe [the TGOD and BZAM] deal is positive for the industry, as accelerated consolidation could be a catalyst to improve economics and revive growth expectations, ultimately resulting in multiple expansion for large LPs,” Gomes wrote. 

“So far, M&A has failed to drive concentration in the industry due to market share erosion. We believe, however, that the market is approaching a maturation point, indicating that fragmentation may have reached its peak. This time, concentration could be (finally) happening,” he said.