Canopy + Couche Could Be Global Pot Shop Dream: Cannabis Weekly

(Bloomberg) -- On the face of it, Canopy Growth Corp.’s agreement with convenience-store operator Alimentation Couche-Tard Inc. to open a single store in London, Ontario doesn’t exactly scream “big deal.”

But the tie-up could prove to be the most significant deal for Canopy since its $4 billion investment from Constellation Brands -- if it can leverage Couche-Tard’s massive global footprint. Laval, Quebec-based Couche-Tard has a network of about 16,000 stores in North America, Europe, Asia, Latin America and the Middle East. That includes 7,800 convenience stores in the U.S., where it’s in every state except Utah and Nebraska.

Canopy Chief Executive Officer Bruce Linton was uncharacteristically tight-lipped about the Couche-Tard tie-up, declining to comment on whether the London store will be a launchpad for a bigger partnership. “Canada is an excellent place to figure things out, but it’s not the primary place from which a company can be operating and be a globally relevant player,” he said in an interview Friday.

Couche-Tard said in September, one month before Canada legalized recreational pot, that it was interested in the cannabis market. “We’d rather be part of that solution, part of that journey, than sit on the sidelines and wait too long,” CEO Brian Hannasch told BNN Bloomberg TV.

Tilray Inc. also hopped on the deal train last week with plans to acquire hemp-food manufacturer Manitoba Harvest for up to C$419 million ($319 million), its first foray into the food industry. Much like Couche-Tard, Manitoba Harvest brings a large distribution network to the deal. The company sells its products at more than 13,000 points of sale across the U.S., including Walmart, Costco, CVS, Kroger, Whole Foods and Amazon, potentially opening the door to mainstream sales of new CBD products down the road.

Pot REIT?

Canopy has accomplished many firsts in this industry, including the first pot company to go public and the first to hit C$1 billion in market value. It may have its sights on another first, whether it’s the first cannabis bond or the first spin-off of a cannabis REIT.

Linton said Friday the company wants to leverage its tangible assets, which he values at a “couple billion dollars,” and is considering everything from issuing bonds to mortgaging its properties to spinning them off into a real estate investment trust.

“I do not wish to continue to be complemented on the extraordinarily clean balance sheet I have,” he said. “It’s not an efficient use of assets.”

Cannabis companies have only just started tapping the debt markets, and none of them have issued a straight bond. Canopy raised C$600 million in a convertible bond sale last June.

Optimism Abounds

There is no shortage of optimistic forecasts about how big this industry is going to get, but a note last week from Seaport Global Securities may take the cake. Analyst Brett Hundley expects the global cannabis market to approach $630 billion by 2040 from $12 billion today, with the U.S. market amounting to almost $95 billion and the U.S. CBD market alone reaching $24 billion. (Interestingly, Seaport gave the three largest names in the space -- Canopy, Tilray and Aurora Cannabis -- neutral ratings despite that upbeat outlook.)

The U.S. pot market will bifurcate into two parts: the sale of recreational items into dispensaries and the sale of health and wellness products into mainstream outlets, Seaport predicted. “This plant has the potential to become big business -- and an important strategic partner -- for many existing companies in many existing industries,” Hundley wrote.

We won’t know whether that forecast is correct for more than two decades, but in the meantime there are still lots of headwinds to overcome, including growing regulatory scrutiny of CBD products and the way they’re being marketed.

Expensive Vice

The cannabis portion of Bloomberg’s 2019 Global Vice Index, an annual tracker of the cost of amphetamines, cannabis, cocaine and opioids, found that the most expensive place to buy a gram of pot is Madagascar at 1,210 percent of average weekly pay, while the cheapest is Botswana at 0.16 percent. The U.S. is 1.79 percent and Canada is 2.02 percent.

Canada’s cost is virtually unchanged from 2018, when it was 2.03 percent, but the U.S. cost of cannabis has risen from 1.41 percent. When you factor in the other drugs in the vice index (some may take exception to them being lumped in with cannabis), it’s much cheaper to get high in Canada, however. Canadians pay just over $300 for a “basket of vice” consisting of the four categories of drugs, while Americans pay $846.