Breakingviews – The cannabis industry buys suit and tie

LAS VEGAS (Reuters Breakingviews) – Las Vegas has made its reputation on sin. It may therefore seem appropriate that the cannabis industry has chosen to hold its largest annual gathering this week in the city. And just as Vegas has used conferences to try to clean up its reputation – it now hosts more than 21,000 people each year – the weed industry is also moving in that direction. In the United States, the drug is banned by the federal government and less than a month has passed since Canada legalized it for adult use. But a varnish of acceptability began to settle on the sector. It's as if cannabis was trying its first suit and tie.

Companies that converge at the marijuana conference and exhibition have exceeded their speed of exception alarmingly. Aurora Cannabis and Canopy Growth added a stock listing in New York in 2018, while Tilray became public on Nasdaq. Each was worth $ 10 billion earlier in the year. The Canadian Securities Exchange has 111 pot companies – the only North American stock exchange where companies with US business relationships can issue shares – and cannabis producers accounted for the majority of the 3 , $ 6 billion meeting at CSE in the first 10 months. month of the year. He is now affectionately known by his new clients as the Cannabis Stock Exchange.

The culture of the material belongs primarily to Canadians, but US companies are developing to develop metaphorical products, spikes and picks, ranging from non-alcoholic marijuana beer to high-tech rolling machines and synthetic cannabinoids from the United States. yeast.

Large consumer goods companies are watching for good reason. The estimates are not very scientific, but broker Cowen estimates that cannabis revenues in the United States could reach $ 75 billion by 2030, compared to about $ 50 billion for coffee and $ 100 billion for beer today. Meanwhile, there are more and more literal signs of change: Canopy has taken over a former Hershey chocolate factory in Smith Falls, Ontario. And Auxly, a Canadian company that is taking a stake in marijuana companies, is helping build on what was once a Kraft food factory.

For now, the main problem is that even if the money comes in, it is not easy to move, at least south of the border. National banking chains in the United States – and some in Canada – consider cannabis producers to be banned, simply because big financial companies do not want to risk their reputation and their relationship with the federal regulators.

Specialized payroll services like Denver-based Wurk have started doing mundane things that ADP will not do. Still, companies like MedMen, the $ 2-billion US dispensary operator, can not raise funds raised in Canada, nor can they open an account with JPMorgan Chase or Wells Fargo. Weed companies must pay taxes – but because of the federal rules, their operating expenses are not deductible.

The contradictions are almost absurd. Vegas, despite its liberal approach to gaming, is one of the most difficult places for local weed control companies to access financial services. Many dispensaries must only deal in cash and keep them in guarded safes. Similarly, the wages of "executioners" who sell gums, flowers, chocolate and resins throughout the city are paid in hard currency. Even tax invoices are settled with bank notes. Casino magnate Sheldon Adelson paved the way for the opening of Planet 13, the world's largest luxury health clinic, located five minutes walk from the Trump International Hotel.

Federal decriminalization would erase many of these problems and progress has been made. This month's US elections brought a modest victory to the cannabis industry. Opponents like Texas representative Pete Sessions lost seats and three states – Missouri, Utah and Michigan – voted in favor of legalization in one way or another. Meanwhile, one of the biggest federal opponents of marijuana, US Attorney General Jeff Sessions, was forced to resign at the request of President Donald Trump – albeit for other reasons.

Weed is not a priority for Congress, but it is a bipartisan issue – even Republican Senator Orrin Hatch is interested in medical purposes. Greater legalization, however, is not an absolute advantage. A federal regulatory system that treated weeds as tobacco rather than alcohol, with strict marking rules, would ruin many business plans.

In the meantime, the biggest trophy for cannabis-producing companies is validation by others already respectable. As found Canopy Growth after getting its $ 4 billion investment from brewer Constellation Brands this year, the money makes it possible to buy friends. Bruce Linton, president and CEO of Canopy, who once fled Wall Street and was banned from ringing the New York Stock Exchange when Canopy appeared, just spoke at a conference at the invitation from Morgan Stanley. Bank of America and Goldman Sachs worked on the Constellation contract, while the Vanguard fund manager is one of the largest shareholders of Canopy and Aurora. These names will bring even more institutional money, which will allow them to gain more respectability.

However, none of this makes these companies good investments. In the traditional discounted cash flow model that analysts often use, most of the value of a business comes from what is known as its terminal value, which is the fraction that only come into play after five or ten years. The most important question is therefore which companies will still be present in 10 years. Canopy's $ 4 billion war chest gives him a good shot, though for now he continues to lose money. Leaders may be in fashion these days, but many investors will have to leave their clothes.