The next wave of attacks on cannabis companies is likely to shift from short raids to traditional activist campaigns focused on better governance. That’s according to Patricia Olasker, Partner at Toronto-based Davies Ward Phillips & Vineberg LLP, which ranked number one in cannabis M&A advisory in 2018.
In an interview, Ms. Olasker pointed out that short sellers have dominated cannabis headlines after eye-watering valuations drew the attention of hedge funds that bet against stocks. Indeed, the likes of Tilray and Aphria became targets of short sellers last year, with some investors criticizing them very publicly. The question now is how activism will evolve and what types of companies will find themselves in the crosshairs.
CorpGov: To what degree has activism been a factor for listed cannabis companies and is it changing?
Ms. Olasker: We have already seen a lot of short-seller activism in the cannabis space. When valuations start to come down to more realistic levels, as stocks begin to trade on real valuations – like multiples of EBITDA – we may start to see more traditional activists focus on the sector. Is Nelson Peltz’s involvement with Aurora Cannabis a sign of things to come?
CorpGov: How has valuation worked so far and are investors ready to look at earnings as a reason to own stocks?
Ms. Olasker: Initially, valuations were based on a unique industry metric – “funded capacity” – and trading was largely driven by speculation. Companies are still pre-profitability at this stage. Investors are starting to look for revenue or EBITDA, but we’re still a long way from seeing it across the board.
CorpGov: What kind of issues will the industry grapple with as companies evolve?
Ms. Olasker: Governance is an issue. Some of these companies have gotten very big very fast before they had time to put proper governance practices in place. Boards have been populated by friends, and the CEOs are rock stars who may be hard to manage.
CorpGov: Do you think boards are acting responsibly enough and if not, what are they doing wrong?
Ms. Olasker: There are some public situations with boards not paying adequate attention to what management was doing. That is changing.
CorpGov: You were personally involved in multiple large M&A deals last year. How does the cannabis M&A landscape look over the next year?
Ms. Olasker: Interestingly, the domestic M&A that we saw in 2017-18 is probably just about over. The first wave of M&A was driven by a need for capacity so there was a flurry of consolidation, but that’s done.
In the year ahead, the M&A we expect to see will be more in the way of acquisitions by foreign buyers and partnerships with non-industry players like consumer packaged goods companies, alcohol and tobacco.
CorpGov: Where did most of the Canadian cannabis companies originate?
Ms. Olasker: The Canadian cannabis industry had its origins in medical cannabis which has been legal in Canada since 1999. Recreational cannabis has only been legal since October 2018. But there has always been an illicit market which, in recent years, began to show the hallmarks of legitimate business as unlicensed dispensaries began popping up across the country. Some of the companies you see now may be successors to those businesses that have been around for years.