After a slow start after a disappointing 2019, cannabis M&A closed 2020 with a bang. Deals valued at over $ 600 million were announced immediately after the November election. The outlook for the new year is expected to continue the year-end explosive trend, with an order backlog of nearly $ 2 billion through 2021. The COVID-19 pandemic has boosted sales of cannabis products, and the election results open five new states for legal cannabis use and possible federal regulatory reform further raise the prospect. Analysts now predict that the U.S. cannabis market will double by 2025.
The growth is expected to be led by multi-state operators who have achieved economies of scale, cleaned up their balance sheets and stocked dry powder for roll-up acquisitions. Cannabis companies raised nearly $ 134 million in the two weeks leading up to Election Day, up 185% from the same period last year. Most of the money went to multi-state operators. In addition, the largest stocks by market capitalization posted a gain of around 20% prior to the election and are now trading at record volumes, leaving enough stock currency for further acquisitions.
Among the most important acquisitions in the last year:
- Curaleaf continued its expansion in multiple states with two of its largest acquisitions – the stock purchases of its affiliate cannabis oil company Select and Grassroot, another MSO player. Curaleaf is now the world’s largest cannabis company by annual sales, with $ 1 billion in annual sales, with offices in 23 states and 96 open pharmacies. Curaleaf also raised $ 215 million privately last year for further expansion.
- Just behind, Aphria and Tilray announced in December that they would merge. This will create what they believe to be the largest cannabis company in the world with an equity value of around $ 3.8 billion. The combined company will have facilities and offices in the United States, Canada, Portugal and Germany. The transaction is expected to close in the second quarter of this year.
- Also in December, Illinois-based Verano Holdings LLC announced plans to go public through a reverse acquisition of a Canadian Shell company valued at $ 2.8 billion. This deal followed the announcement that Verano will merge with AltMed of Florida.
- In addition, New York publicly traded cannabis company Columbia Care signed a definitive agreement last month to acquire Green Leaf Medical, a privately held cannabis maker and distributor in Maryland, for $ 45 million in cash and $ 195 million in stock. The acquisition is expected to close this summer. Including Green Leaf’s inventory, Columbia Care will operate 107 facilities including 80 pharmacies and 27 cultivation and manufacturing facilities. Columbia Care also took advantage of cannabis fever last year by raising $ 100 million privately.
- Also in December, Ayr Strategies announced Liberty Health Sciences, one of the largest cannabis companies in Florida, for $ 290 million in shares, and Garden State Dispensary, a New Jersey marijuana company, for $ 41 million in cash and $ 30 million $ Million in shares to buy and $ 30 million in note form. This follows Ayr’s acquisition of a medical marijuana operator in Arizona in November for $ 81 million. Voters approved the use of marijuana in Arizona and New Jersey in November. Ayr has completed a number of acquisitions in Nevada, Massachusetts, Pennsylvania, Arizona, Ohio, and upon closing in December, New Jersey and Florida.
Not all cannabis companies will rely on acquisitions, however. As an example, Trulieve has focused its efforts on Florida and organic growth. It remains to be seen whether an acquisition-driven approach in multiple states or an organic growth model in one state will prove more sustainable. In the short term, growth and profitability are likely to continue to be hampered by economies of scale restrictions imposed by federal restrictions and various state laws.
With the industry mature and the 2019 bankruptcy, the valuation model for cannabis acquisitions is evolving from a sales-based model typically associated with emerging growth industries to a more mature industry model based on earnings or earnings before interest and taxes, depreciation (EBITDA ). Most cannabis MSOs have stabilized and are generating positive EBITDA, which justifies moving away from a revenue-driven model.
From a legal standpoint, the same restrictions that have preoccupied the cannabis industry for years will continue to challenge deal-makers until there is more clarity on the federal front. The reluctance of institutional investors, financial industry restrictions, random government regulations, and the unavailability of federal forums such as national copyright and trademark registration will continue to be problems for acquirers and their attorneys in this area.
Acquisition agreements must continue to deal with the federal sword of Damocles in the event that federal enforcement is expected to be relaxed under the Biden government and further legislative relief does not materialize as expected. Although the US House passed the Marijuana Opportunity Reinvestment and Expungement Act (MORE) in December to get cannabis out of the Controlled Substances Act, the Senate missed the law in 2020 and has to come back in 2021 be introduced. In particular, the MORE Act has no impact on the existing federal cannabis ordinance such as the Food, Drug, and Cosmetics Act, under which the FDA has restricted the use of CBD in certain products, even though hemp was removed from the Controlled Substances Act in 2018.
The cannabis M&A market is in a more mature phase as MSOs will be more picky about their approach rather than continuing the land grab mentality of years past. Due to the improved financial strength, these MSOs should further expand their presence in either existing or new states in 2021. Although the uncertainties are great, further consolidation and expansion through additional acquisitions in 2021 should continue and offer the deal makers and their lawyers numerous opportunities.