Large corporations are still squeamish about investing in cannabis. This means great opportunities for smaller players
At the end of July, the cannabis industry watched as two Canadian companies set a new record. Aurora Cannabis acquired MedReleaf (another Canadian cannabis producer) for CA$3.2 billion — $2.3 billion in U.S. dollars. This, the largest cannabis acquisition to date, created a company capable of producing 570,000 kilograms of high-quality cannabis per year at a cost of below $1 per kilogram.
It was a validating moment for those of us in the industry. Cannabis as a business is still in its infancy. For the most part, we’re a group of entrepreneurs who were willing to take a chance on a product that, until recently, might have landed us in jail (or, at least, in some trouble with state authorities). The increase in mergers and acquisitions shows that we were smart to take the risk. In the first half of 2018, M&A activity nearly doubled from a year earlier to 145 deals in North America, according to Viridian Capital Advisors. Through June 22, public and private cannabis companies have raised $4 billion, up from $1.3 billion just one year ago.
Right now, the biggest deals are happening in Canada, which the U.S. market looks to as our future. While cannabis is still considered a Schedule 1 narcotic at the federal level here (despite the fact that it is legal to use and buy in two-thirds of the nation), the herb was recently legalized in Canada. That has not only paved the way for Canadian citizens to reap the medical and recreational benefits of cannabis, it also means Canadian companies can tap the financial markets, something U.S. companies still struggle to do.
It’s worth noting that Aurora initiated its purchase of MedReleaf in May, a month before the Canadian Senate voted to legalize cannabis. At that point, big public companies were still pretty much shut out of the market. They didn’t want to risk acquiring businesses that might not become nationally legal and even if they wanted to, it’s unlikely banks would have been willing to underwrite or finance such purchases.
Aurora was able to buy MedReleaf in an all-stock deal. In the post-legal Canadian world, the market is now open to all comers as Canadian banks will have no problem working with corporations to finance mergers and acquisitions.
While that means many small companies are now attractive acquisition targets, it also means that big alcohol and pharmaceutical companies will be sniffing around Canadian cannabis companies. Constellation Brands, the company behind beers such as Corona and Modelo, has already made a significant investment in Canopy Growth, an Ontario-based cannabis producer. Last October, Constellation bought a 9.9% stake in the Canadian company. In June, Constellation bought another third of the company. Then in August, the alcohol company bought another 104.5 million shares in a deal worth CA$4.5 billion ($3.45 billion in U.S. dollars). If Constellation ends up buying Canopy, as many on Wall Street are speculating, it will dwarf that Aurora MedReleaf acquisition.
Back in the states, the numbers are smaller but the market is no less busy. MedMen, the fast-growing cannabis retailer, has made a slew of acquisitions including its recent purchase of Treadwell Nursery, a cannabis grower and distributor in Florida, for $53 million. In May, four cannabis companies joined forces to create TILT Holdings, which builds cultivation facilities, sells software to help manage the process and offers financing to the cannabis industry. The combined company expects to bring in $70 million this year. And at my company, KushCo Holdings, we’ve made four recent acquisitions that enhance our creative branding capabilities and help us expand into vaporizers and the gas and solvents needed to extract oils from cannabis to produce concentrates.
At some point, the U.S. market is going to get big enough for companies such as Constellation to justify making cannabis acquisitions here, especially if the government eases restrictions on national banks so they can work with cannabis companies without risking legal repercussions. The window before that happens is small. Before it closes, expect to see more M&A activity among established U.S. companies in the hopes that they will become big enough to fend off the larger competition when it inevitably comes calling.
