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Новости/Аналитика

Why the hemp market is changing the philosophy of business development

09.12.2019

The maturation of the industry predetermines the trend according to which it is necessary to concentrate less on capturing market share and more on profitable growth. This development strategy makes the industry more stable and viable, and also increases institutional capital, although it punishes retail investors who bought shares of the first wave of hemp companies that entered international trading floors.

The pages of the profile electronic publication of Ukrainian hemp breeders have already described "Confusion in the mergers and acquisitions of US hemp industry companies." What these trends are talking about and how they will affect the development of hemp business, we will try to analyze in this material.

In the hemp industry of the North American continent, most likely in 2020 there will be a wave of mergers and acquisitions among large and medium-sized companies. Such conclusions can be drawn on the basis that for several quarters in a row capital growth in the industry has not been observed, stock prices for hemp companies are falling, and producers are talking about sales volumes that are much lower than described in the previously calculated business plans.

With the advent of euphoria among investors in 2018 - early 2019 due to a sharp increase in the volume and their share in the hemp market, contrary to the harsh realities of building a profitable business, at the end of 2019, hemp specialists experienced clear signs of a collapse. Whoever has caught this dynamic is actively pursuing a policy in the market in such a way as to save the resources available to them, and speaking generally, to survive in a falling market.

Degradation trends in 2019 immediately affected several sectors of the hemp industry in Canada and the United States, despite the fact that market experts predict its rapid development and achievement of the level of tens of billions of dollars in the medium term. According to the expert opinion of a number of consulting companies operating in the hemp market, the current permanent crises in various hemp sectors of the economy are inevitable growth problems that are similar to the processes that already occurred during the Internet boom of the early 2000s.

For example, in Canada, a limited number of legal retail outlets specializing in retail sales of legal psychoactive cannabis could not satisfy consumer demand, which led to the prosperity of the illegal marijuana market, which, according to Canadian officials, was supposed to decrease significantly during 2018-2019. 

In the United States, several states (Washington, California, Oregon) are “suffering” from oversupply, lowering producer prices. The scandal surrounding fatalities, as well as a significant number of diseases associated with vaping, also significantly reduced demand in one of the key hemp markets, in which, according to manufacturers, there is no well-developed regulation. And the cannabidiol market (CBD), previously seen as a sector with significant growth potential, has faced regulatory challenges and consumer skepticism.

Signs of distress are rampant in the M&A market in the US and Canada as public asset valuations continue to fall, disrupting the philosophy and logic of transactions. An alternative way of investing financial resources in the industry, which is a "basket with large stocks of various varieties of hemp," collapsed by 56% of its maximum, observed in March 2019. One of the most important indicators of investors - the market for new listings, is practically collapsed, and many previously announced mergers in the sector are being revised or discontinued. 

 

According to the general director of the investment bank Ello Capital, specializing in hemp business, “Management of companies, analyzing their performance indicators, as well as current cash positions ask themselves the question - how can we get through the problems that arise in the industry and actively developing negative trends.” Accepting the fact that “there is no liquidity to increase capital,” one of the ways to survive in the market is to actively consolidate the industry.

 

In 2019 alone, at least 11 transactions in the hemp business were discontinued for a total of more than $ 2.9 billion related to changes in the market situation, as well as targets for the hemp industry in North America 

Despite the obvious problems in the hemp use sector in the medical sector, most market operators are still optimistic that the industry will gradually regain its position. The reason for this, in particular, is actions by government agencies trying to maintain a high rate of development of the hemp industry. For example, in the most densely populated Canadian province of Ontario, local authorities said they would dramatically increase the number of licensed points for selling legal psychoactive cannabis from 24 to 1,000 stores. 

Commentary of the Ukrainian Technical Hemp Association

Companies are ready to participate in merger negotiations, given the fact that financing opportunities in the public and private markets are almost closed, including for IPOs. Since enterprises can no longer afford to squander an existing resource, they evaluate the options for mergers and acquisitions as the only viable way to further develop. The maturation of the industry predetermines the trend according to which it is necessary to concentrate less on capturing market share and more on profitable growth. This development strategy makes the industry more stable and viable, and also increases institutional capital, although it punishes retail investors who bought shares of the first wave of hemp companies that entered international trading floors.

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