Cannabis Operators To Create National Brands Through M&A
By Alan Burdziak
There has already been much consolidation in the cannabis sector, but industry experts say there’s much more to come in the next two years, as national brands emerge via M&A among Multi-State Operators in the next two years.
Already, companies like MedMen, Cresco Labs Inc. and Acreage Holdings have been among the main buyers in the US and are creating national footprints. In Canada, where cannabis is federally legal, Canopy Growth Corporation and Aurora Cannabis have been acquiring companies and have nationwide reach. MedMen acquired PharmaCann, a dispensary chain, for $682 million in equity in December 2018 — one of nine deals by MedMen since the beginning of 2018, according to Mergermarket data. Acreage bought cannabis edible manufacturer Gesundheit Foods for $160 million in December and cultivation and processing company Nature’s Way Nursery of Miami for $67 million in January, according to Mergermarket data.
The cannabis market in Canada is expected to reach $5.9 billion in sales in Canada by 2022 and almost $17 billion in the US that year, according to a report by BDS Analytics.
Sabas Carrillo, CEO of Adnant Consulting, which focuses on cannabis, says he expects the first large brand with a national footprint in the US will emerge via M&A either this year or next. Such brands will be looking for shelf space at retailers, changing the landscape of retailers selling only their own brands, he adds. Cannabis consumers are like consumers of any other product and will establish brand loyalty, resulting in retailers needing to sell multiple brands. He also expects to see more deals north of $500 million. Already, we’ve seen Cresco Labs acquire Origin House for $1.1 billion Canadian, and Harvest Health & Recreation Inc. buy Verano Holdings for $850 million. Both deals were announced in 2019.
Once US federal legalization happens, Brent Johnson, managing partner of the Hoban Law Group, a full-service firm that specializes in cannabis, said he expects many companies with US operations that touch the plant and are listed on the Canadian Securities Exchange and OTC Markets Group to move to the NYSE, Nasdaq and Toronto Stock Exchanges. Currently, companies that have US operations that touch the plant cannot list on those three exchanges.
Because the US government’s prohibition of marijuana makes moving products across state lines illegal, Multi-State Operators often look to M&A to build scale more quickly and cheaply than doing so organically, Johnson says.
So far, much of the consolidation in the space has been in cultivation and retail, according to Sumit Mehta, founder and CEO of investment bank Mazakali, which provides advisory and other services for cannabis companies and investors. Now he thinks there will be more activity in brands as Multi-State Operators or other big players will want to acquire to create a national brand.
Activity has been hot in both the US and Canada, says David Kideckel, analyst and managing director at Canadian investment bank AltaCorp Capital. He also expects brands and retail to be big consolidators in the near future. Brands will be especially important for retailers in Canada, he says, because packaging laws there are more restrictive than in the US.
All four experts expect US federal legalization to happen in the next several years. Already, Congress is consider a bill called the Secure and Fair Enforcement Act, which would allow banks to work with cannabis companies. Mehta says legislation easing the federal prohibition on marijuana will likely happen in 2021 or sooner, due to its widespread appeal.
As laws change on cannabis, it will be easier to do deals. Section 280E of the Internal Revenue code, Johnson says, prohibits businesses from deducting many operational costs, like rent and salaries, associated with the sale or distribution of schedule I or II substances, making it more difficult to value companies. Marijuana is a Schedule I controlled substance.
Changes to the tax code and approval of the SAFE Act will spur growth in the industry organically and via M&A, Johnson says.
Alan Burdziak is a Mergermarket reporter based in New York.