Merrill Lynch launches marijuana sector coverage, predicts more cross-border deals

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Merrill Lynch cannabis coverage, Merrill Lynch launches marijuana sector coverage, predicts more cross-border deals

Bank of America Merrill Lynch deepened its interest in the cannabis industry by initiating coverage of the burgeoning sector, less than a year after it financed Constellation’s multibillion-dollar investment in Canada’s Canopy Growth.

The report, by analyst Chris Carey, predicts two events may lead to a paradigm shift:

  • Canada reaching marijuana oversupply by 2021.
  • U.S. legalization.

“Importantly, whether legalization occurs or not, we think the prospect of legalization, an event which could lift U.S. asset prices, prompts Canadian companies to accelerate U.S. strategies, and see some announcing deals in the U.S. before legalization,” the report stated.

That prescient call was made the day before Canopy Growth struck a landmark deal to buy New York-based Acreage Holdings for $3.4 billion – pending U.S. legalization.

Canadian companies on the Toronto Stock Exchange can enter the United States now via ownership structures that do not become active until U.S. federal law changes.

If the United States were to legalize medical cannabis federally, justifying the high valuations of “Canada only” plays would become more difficult, Carey noted.

‘International strategy now critical’

The report said the combined market share of the 14 largest Canadian cultivators could exceed domestic market consumption by mid-2021, and international strategies are now critical as the Canadian market is small relative to global opportunities.

Furthermore, oversupply in Canada would drive prices lower and accelerate consolidation

“There are over 50 publicly traded Canadian cannabis licensed producers, far too many for a cannabis market the size of Canada’s, in our view,” according to the report.

Bank of America Merrill Lynch, based in Charlotte, North Carolina, estimated “a global $166 billion industry is emerging from the shadows” – with the U.S. accounting for 34% of the total addressable global cannabis market.

Europe follows at 25%, with Asia (21%), Africa (9%), Latin America (6%) and Oceania (2%). Total addressable market includes regulated and illicit markets.

Canada accounts for just 3% of that market, the key driver for companies located there looking internationally for growth.

“We expect the illicit market to lose share to the legal market in North America, but the rest of the world will remain dominated by an illicit market,” Carey wrote.

That potential disruption could have an even bigger upside.

“We estimate consumer categories generating $2.6 trillion per year in revenue could be disrupted by cannabis, from health/wellness to alcohol,” the report noted.

Global developments

The report called the U.S. Food and Drug Administration’s approval of Epidiolex “an important step” in medical cannabis legalization.

“A second critical development for the medical cannabis sector is happening on a global basis,” Carey wrote.

He cited the January decision by the World Health Organization to recommend the rescheduling of cannabis, removing it from Schedule IV of the 1961 convention on drug control and moving it to a much less restrictive category.

A third critical development, Carey noted, came in February when the European parliament called for a uniform definition of medical cannabis.

Bank of America Merrill Lynch initiated coverage of industry leaders Aurora Cannabis, Canopy Growth, Cronos GroupThe Green Organic DutchmanHexo Corp. and Supreme Cannabis.

Matt Lamers can be reached at

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