Not many cannabis stocks on the ASX are this big but they hope merger and acquisition activity will help them scale
Health & Biotech
There’s been little M&A (merger & acquisition) activity in Australia’s cannabis sector but that’s changing in 2021.
Already this year the market has seen the merger of Cannpal (ASX:CP1) and Auscann (ASX:AC8) and a handful of stocks make acquisitions of private companies.
In the past month alone this has included Elixinol (ASX:EXL), Creso Pharma (ASX:CPH) and ECS Botanics (ASX:ECS).
ECS bought Victorian cultivator Murray Meds which uses a low-cost outdoor model.
ECS undertook a $6 million capital raising to complete the deal and Alex Keach declared it “positions ECS as the largest, lowest cost and most geographically diverse cannabis producer in Australia”.
And Elixinol bought German CBD product maker CannaCare.
Is the M&A activity in recent months just the tip of the iceberg? Mark Bernberg from The Green Fund thinks so.
Speaking with Stockhead he noted M&A in the North American sector had been going on for nearly two years and now was reaching Australia. And it was not just because companies can.
“What we’ve seen in the last two years is huge consolidation in the North American market – it started with Canada and its now happening in the US where economies of scale need to be taking place,” Bernberg said.
“Because at the end of the day the cannabis industry could well be as big if not bigger as the booze or alcohol industry.
“And if you look at the liquor industry you don’t have two or three hundred companies, you’ve got essential five to 10 major companies with a couple of bespoke companies operating in other areas.”
Bernberg thinks a consolidation of the cannabis industry driven by M&A is inevitable in Australia.
“The Australian industry is just not big enough to support 40 cannabis companies and what most of these companies are doing is looking to position themselves into the European market,” he said.
“So, I think you’re going to see significant consolidation in the Australia market.
“If you think about the US there are three major CBD companies operating. If you look at Australia, you’ve got Ecofibre and Elixinol – and MedLab and ECS doing CBD products – Australia is not big enough to support it.
“I just feel the natural order of things is for these companies to create economies of scale, operating efficiencies and consolidate their capital base, you’re just going to have to see consolidation.”
While Europe (particularly Germany) was an appealing opportunity, Bernberg warned that it would not suffice to simply cultivate in Australia and export.
He pointed to the example of Canadian companies looking to Germany that set up shop over there and argued eventually Australian companies would have to have a local presence like them.
“At some point in time these European countries are going to go ‘Look, we’re not creating jobs, a lot of money is flowing out of the country and the economic benefit is not stronger than it could be’ and I think this has to be something that has to be flagged,” he said.
Stockhead also spoke with Oliver Horn, CEO of Elixinol (ASX:EXL).
Horn said his company’s own M&A deal gave them a big foot in the European cannabis market.
“The reason why we went that way – to acquire the business rather than putting a JV or partnership approach in place – it simply because the market is developing so quickly and the growth is so high we wanted to take a leadership position early on in this market,” he said.
“Germany [is] the second largest market in Europe, fastest growing, set to be the biggest and they’re the number one brand. So we just didn’t want to miss that opportunity.”
Horn expects more M&A deals to come in the cannabis sector.
“I would expect so because the market is fragmented, no one has more than single digit market share at the moment,” he said.
“And now with the regulation being confirmed and probably the most positive in the world, CBD in Europe people are looking hard at creating opportunities there.”
At Stockhead, we tell it like it is. While Creso Pharma and ECS Botanics are Stockhead advertisers, they did not sponsor this article.
Health & Biotech
Health & Biotech
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