As the government prepares for legalization of recreational marijuana this summer, Canada’s cannabis producers and distributors are bracing themselves for a period of consolidation leading up to and following legalization. A recent report published by Ernst&Young (EY) provides insight into the current state of Canada’s cannabis industry. EY surveyed 11 licensed producers and found that many of those surveyed believe that consolidation in the cannabis industry is inevitable due to the high barriers for new players. Two of the biggest hurdles cannabis producers and distributors face is difficulty obtaining financing from banks and the slow speed at which the government gives out new licenses. There are currently 79 licensed producers in Canada which offer opportunity for those wishing to enter the market to do so via an acquisition of an already licensed producer. As demand will increase post legalization, these relatively small producers may encounter difficulty keeping up with the increase in demand, which may lead to a larger producer buying their small competitors in an effort to maximize production efficiency and meet increased consumer demand.

The slow speed at which the Canadian government has issued licenses to grow and distribute cannabis will also likely increase consolidation trends in the industry. As established companies in similar industries, such as tobacco and pharmaceuticals, seek to enter the cannabis industry post legalization, they will likely look to enter the market quickly. Acquiring small producers that are already licensed and have established production operations will be an attractive option that would allow established companies to enter the cannabis industry quickly. In fact, there have been a number of mergers and hostile takeovers within the cannabis industry in the last few months. EY is predicting that consolidation and inorganic growth will continue within the industry for the foreseeable future, leaving two or three dominant players in the industry emerging with a handful of craft producers.

The author would like to thank Olga Lenova, Articling Student, for her assistance in preparing this legal update.

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