Upcoming Mergers in the Cannabis Industry to Watch

The amount of capital raised during the past two months is a strong signal that the cannabis sector is prepping for more acquisitions in 2021 as more states have legalized the adult use of marijuana.

“We’ve already seen a number of deals conducted in late 2020,” says Timothy Seymour, founder of Seymour Asset Management in New York and portfolio manager of the Amplify Seymour Cannabis ETF (ticker: CNBS), whose top three holdings are GW Pharmaceuticals ( GWPH) at 10.7%, Aphria ( APHA) at 8.6% and Canopy Growth Corp. ( CGC) at 8.6%.

The larger multistate operators have raised money and are on a land grab before the sector opens up to larger strategics and institutional capital, he says, and the level of deal flow will rise during the next three to six months.

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“The cannabis industry is already a $50 billion industry and this should triple by the end of the decade,” says Seymour, whose exchange-traded fund CNBS generated a return of 60% year to date and 137% for the past six months. “We are talking about recreational, medical, wellness, lifestyle and consumer packaged goods all rolled up into one massive growth opportunity.”

New Jersey Gov. Phil Murphy signed a bill in February legalizing recreational use of cannabis even though voters approved adult use last November. Virginia lawmakers also approved a bill in February for the recreational use of marijuana, but sales would not start until 2024. There are now 15 states along with the District of Columbia that have legalized the recreational use of cannabis.

Deal activity has ramped up during the past three months — Cresco Labs (CRLBF), a Chicago-based multistate operator that has a footprint in nine states, acquired Bluma Wellness for $213 million, and Verano, a Chicago-based multistate operator in 12 states bought Florida-based Alternative Medical Enterprises (AltMed) for an undisclosed amount. Another large deal occurred when New York-based Ayr Strategies (AYRWF) acquired Florida-based Liberty Health Sciences (LHSIF) for $290 million.

Public Companies That Could Seek Deals

Since January, the cannabis industry has raised $2 billion in equity capital without conducting any roadshows or receiving funding from banks, which will increase the momentum in merger and acquisition, or M&A, activity, Seymour says.

“The companies raised the money themselves,” he says. “Now that these companies are fresh with new cash, they can buy companies for cheaper prices rather than doing a share deal. This is going to fast-forward the M&A calendar.”

The number of deals in 2021 could exceed last year, and the trend could continue for both public and private companies during the next couple of years, says Jason Spatafora, co-founder of marijuanastocks.com and head trader at truetradinggroup.com.

“The deals will depend heavily on the geography and some of the tailwinds the industry is facing,” he says. “It’s a good thing the Democrats are controlling the three executive branches of government.”

Some cannabis companies were caught off guard when the Democrats won the Senate in 2020, since they advocate for the legalization of marijuana use, Spatafora says.

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“This added a premium to acquisitions, and there were higher deal prices,” he says. “Some companies thought they had more time to enter some state markets.”

Cresco Labs is likely done with acquiring companies for the short term while Curaleaf (CURLF), a Wakefield, Massachusetts-based vertically integrated cannabis operator, has done a good job with its acquisitions and “planted a lot of flags,” Spatafora says. The company operates in 23 states with 101 dispensaries and has 22 cultivation sites and more than 30 processing sites.

“Curaleaf does not have to be as aggressive as some other companies that were more focused on building out their own networks,” he says.

The likelihood of public cannabis companies acquiring their public competitors remains low right now, and companies have earmarked their cash for other priorities, Spatafora says. Once politicians iron out the details of the Secure and Fair Enforcement Banking Act on how banks and financial institutions can work with the cannabis industry since the federal government has not legalized the drug, then the access to the cost of capital could be lower.

Areas in Cannabis That Will See M&A

The companies armed with cash will be very inquisitive and aggressive. Those include Curaleaf, Green Thumb Industries (GTBIF), a Vancouver and Chicago-based national cannabis consumer packaged goods company and retailer, and TerrAscend (TRSSF), a New York and Toronto-based cannabis company operating dispensaries in California and a manufacturer and distributor of hemp-derived products, Seymour says.

“The stocks of these companies rallied after they raised capital,” he says. “They should be seen as growth companies. This is a big moment for the industry.”

Trulieve Cannabis Corp. (TCNNF), which is primarily a Florida operator, will also be active on the deal-making front, Seymour says. The company reported $193.4 million in cash as of September 2020.

Private companies such as PharmaCann, Ascend Wellness and Holistic Industries are also looking to grow their footprint through deals, while companies such as Parallel now have structures in place that will lead to aggressive deals on M&A, he says.

“Ultimately, many companies in the sector are looking to sell to a bigger strategic player at some point,” Seymour says.

The overall surge in equity prices in cannabis stocks the past few months has left many operators with a strong cash position and in search of acquisition targets, says Aaron Raub, senior equity analyst at Ambria Capital in Puerto Rico.

One company that could seek more deals is GrowGeneration Corp. ( GRWG), a Denver-based hydroponic grow supplier, he says.

“The management team has a multiyear track record of opening new stores in prime locations through organic growth or acquiring hydroponic and organic garden centers at attractive valuations in a very fragmented industry where competitors often lack the scale and host of services that GrowGen provides,” Raub says.

GrowGeneration has ample capital to deploy since it had a heavily oversubscribed equity offering of $172.5 million in December 2020. Its fourth acquisition was San Diego Hydroponics & Organics, which adds nearly $10 million in “incremental top-line revenue to the company,” he says.

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GrowGeneration has 50 stores and plans to have 55 by the end of the year. In 2020, the company added 14 new and acquired stores.

One of the risk factors is that the company’s long-term acquisition strategy is based on a combination of stock and cash. If there is a sharp pullback in the stock market, it could slow down the pace of capital raised and also decrease the number of acquisitions the company conducts, but GrowGeneration has low debt levels, Raub says.

The number of cannabis deals should rise in the second quarter, but they could be more expensive, especially in Ohio, New York, Florida, Pennsylvania, Michigan, Virginia, Massachusetts and Illinois, since many of those states limit the number of licenses companies can own, says Michael Berger, founder of Technical420, a Miami-based company that researches cannabis stocks.

“U.S. companies now realize you need to partner with one of your own size in order to compete,” he says.

Cannabis companies need to be acquisitive before premiums rise — several companies are generating $200 million in sales per quarter and are no longer small businesses, Berger says.

“Sales growth was strong in 2020,” he says. “No matter what economy we are in, people want cannabis products. It’s a defensive industry; it’s medicine for some people and it has therapeutic uses for recreational users. People will spend money to improve their mental health.”

Companies will look to secure licenses in limited markets they are not currently in, especially markets that have only legalized the medical use of cannabis such as Florida or only recently went recreational and likely have significant growth ahead, says Jason Wild, president of New York-based hedge fund JW Asset Management.

All regions in which cannabis is legal will see more deal flow, while the East Coast and Midwest will prioritize land acquisitions in addition to filling out vertical licensing in individual states, he says. On the West Coast markets, Wild says M&A “will be motivated in large part by consolidation and a desire for scale.”

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Upcoming Mergers in the Cannabis Industry to Watch originally appeared on usnews.com

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