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May 14, 2019

Reading the Cannabis Leaves

What M&A Activity Tells Us About the Future of Cannabis

As more states legalize the use of cannabis for medical and recreational use, cannabis companies are seeing a rapid rise in revenue. Profits are always the long-term goal, but many companies that grow, process and sell cannabis, and related products, are raising capital and seeking mergers, acquisitions and partnerships in order to build a broad infrastructure ready to meet the increase in demand that will likely follow as more markets emerge.

Similar to the flurry of dotcom companies building out their platforms in the late 1990s, cannabis companies are investing vertically in order to provide seed-to-sale capability all under one roof. It’s this development, along with anticipated nationwide legalization, that is driving a number of mergers and acquisitions. Although there has been consolidation in prior years, 2019 is shaping up to be a bellwether, illustrating that the cannabis industry is preparing for a growth explosion.

The Record Breaking Start to 2019

So far in 2019, there have been several mergers and acquisitions worth billions of dollars. The action got an early start with two announcements in December of 2018; the MedMen acquisition of PharmaCann, and the purchase of a 45% stake in Cronos by Altria, the parent company of Phillip Morris USA. The MedMen-PharmaCann agreement included an all-stock transaction worth US$682 million and gave the combined company licenses to operate in 12 states with 79 cannabis facilities. The Altria-Cronos deal equates to US$1.8 billion for a 45% stake, with an option to purchase a majority stake in Cronos down the road.

In March of this year, Arizona-based Harvest Health & Recreation, announced it would purchase Chicago-based Verano Holdings, a vertically-integrated operator of licensed cannabis cultivation, manufacturing and retail facilities, for US$850 million.

More recently, in early April Cresco Labs agreed to purchase Origin House in an all-stock transaction valued at US$824 million. In late April, Canopy Growth Corp paid US$300 million for the right to merge with Acreage Holdings. Ontario-based Canopy Growth Corp, the first publicly traded cannabis company in North America, will purchase Acreage shares for US$3.4 billion, with full legalization acting as a triggering event for the complex merger deal.

In addition to mergers and acquisitions between cannabis companies, there is growing interest in cannabis from non-industry companies, such as alcohol, pharmaceutical, and tobacco – as illustrated by the Altria-Cronos announcement. Companies such as Constellation Brands, an international producer and marketer of beer, wine and spirits, paid $190 million for a stake in Canopy Growth Corp, hoping to counteract slowing beer sales and enter new cannabis-related markets.

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