Schumer’s marijuana reform regulation would create business winners and losers, consultants say

Ever since Senate Majority Leader Chuck Schumer unveiled a draft of his state marijuana legalization bill in July, questions have arisen as to what cannabis companies could gain and lose when the breakthrough legislation goes into effect.

Longtime industry experts have agreed that large, well-capitalized companies will make the most profits in a post-federal legalization world, be it Schumer’s bill or some other measure that eventually becomes law.

“It will be the big dogs that win,” predicted Nic Easley, CEO of 3C Cannabis Consulting from Colorado.

These companies include:

  • Multi-state operators, including smaller ones, who haven’t invested much in the more expensive indoor grows. These MSOs include Curaleaf, headquartered in Massachusetts, and Green Thumb Industries, headquartered in Illinois.
  • National marijuana product brands such as Cookies, based in California and Wana Brands, of Colorado.
  • Retailers with locations in high-traffic areas like Planet 13 on the Las Vegas Strip.
  • Canadian producers with the ability to acquire additional US companies. Think Tilray, Cronos Group, or Canopy Growth, all of whom have positioned themselves to buy US cannabis companies.
  • Mainstream companies outside of the marijuana industry that are quick to enter the field and could dominate through capital power and their own national infrastructure, such as: B. Alcohol dealers and tobacco companies.

That doesn’t mean there won’t be room for smaller businesses, agreed Easley and others.

That’s because the bill – and its likely successors in upcoming sessions of Congress – have a strong focus on social justice.

It would likely also enable interstate trade, which could be a savior for many small cannabis growers.

But larger companies are much better positioned than their mother-and-child counterparts, the experts agreed.

Here are some thoughts on likely winners and losers from Morgan Paxhia of Easley, California, Principal at Poseidon Asset Management, and Frank Colombo of New York, Director of Data Analytics at Viridian Capital Advisors:

How it will likely turn out to be

For starters, Easley, Paxhia and Colombo doubt Schumer’s law will succeed this year or next.

They said the legislation faces many hurdles and question marks, from a lack of support from President Joe Biden to the fact that no Republicans in the Senate have expressed support for the proposed bill.

However, the three experts agreed that state legalization is virtually inevitable, and Schumer’s bill offers insight into how the industry landscape might change in the not-too-distant future.

“There is no question of whether that will happen. It’s when, ”said Easley.

In the meantime, Paxhia said larger vertically integrated companies are poised to grow even bigger through further mergers and acquisitions.

For example, Florida-based Trulieve’s $ 2.1 billion deal announced in May to acquire Arizona-based Harvest Health & Recreation could spell a resurgence in cannabis megafusions.

In large part, this is because the cost of capital is much lower for larger companies than for smaller companies.

In addition, Congress has repeatedly failed to pass the SAFE Banking Act, which would give marijuana companies access to banks and free up more funding.

“This disproportionately benefits the largest companies in our industry and disadvantages the smallest,” said Paxhia. “That really creates a very unfair advantage.

“That’s where I see my greatest worries. And a very easy way to measure this is the cost of capital. “

The largest multistate operators, Paxhia said, have successfully moved in the banking and fundraising arena to the point where they have been able to get financing deals with interest rates below 10%, while smaller companies are still paying interest rates between 11% and 20%. .

“That robs them of the ability to grow and get big,” Paxhia said of the smaller companies.

For example, Illinois-based MSO Cresco Labs announced earlier this month that it had taken out an increased secured loan of $ 400 million with a reduced annual interest rate of 9.5%.

In a press release, Cresco CEO Charlie Bachtell stated that “we have secured funding to take advantage of new growth opportunities”.

But if Congress passed the SAFE Banking Act and lifted the negative effects of Section 280E of the federal tax code, then the winners would likely be smaller MSOs and state operators, Colombo said, because that would put them on a higher level even with the playing field so-called “big dogs”.

“If the banking reform and the 280E reform were passed, those two things combined would be hugely beneficial to the smaller competitors,” said Colombo.

Who will benefit from it

Anyone affiliated with larger corporations will benefit from state legalization.

Paxhia cited Herbl as an example, as the Southern California cannabis distributor also has ties to the American health food industry that could be used to ship marijuana between states.

“Winners in the meantime will likely be those who have more balanced footprints and are not overly exposed in one way or another,” Paxhia said.

That’s also why Colombo and others expect government legalization to be like throwing gasoline into the M&A fire that is already spreading in the industry.

Colombo said this is in part because interstate trade is not realistically in sight anytime soon.

He believes many states – and thousands of communities and counties – would try to protect their own markets. They would see interstate trade as a threat rather than a blessing.

“Real legalization would also encourage M&A bids for the smaller companies,” said Colombo.

But if interstate trade becomes a reality, there could be entry points for smaller businesses to compete and thrive, Colombo added.

“There are good arguments that if you really have interstate trade and full state legalization, it will benefit small US competitors,” he said.

“My general feeling is that states will fight it.”

Colombo noted that in the next year or two, New York alone would likely spend billions of dollars on cultivation and manufacturing infrastructure as medical marijuana companies operating there set up facilities after state legalization of adult use.

“You’re spending what we think must be $ 2 billion for the next two years … and that’s just the cost of upgrading,” Colombo said.

The same would apply to national marijuana product brands that have a presence in multiple states but may not be willing to deal with U.S. Food and Drug Administration inspections the way copackers in the mainstream food and beverage industry can, noted Paxhia.

“How many of these facilities will be food safe or go through the FDA process? It’s not cheap, ”said Paxhia. “This is an area where I see a lot more centralization.

“You need large-scale production to cope with these costs. That could mean a big change here in the US, these little (marijuana edibles) kitchens. It just doesn’t make sense to go through all of this. “

Easley agreed, arguing that micro-business licenses or standalone social justice permits won’t be solid business models over time.

He referred to Michigan, where many entrepreneurs are hoping for micro-business permits.

“They think these microlenses, or smaller compliance-based license types, are so expensive. … you will literally lose money over five years for what the supply and the cost of the market. “

Californian companies at a disadvantage?

Many post-state legalization industry losers could turn out to be California-based companies considering the cost of doing business there, all three experts said.

But, according to Paxhia, there are still “thousands and thousands” of winemakers in the state caring for winemakers, and there is no reason why the same might not work out for marijuana growers too.

Another big question will be how interstate trade works and whether national shipping is workable – or whether some states will try to put up barriers to prevent the movement of marijuana across their borders, Easley and Colombo said.

In any event, companies with established national shipping routes would be one of the bigger winners in international trade.

“The thing that nobody really takes into account is that the liquor distribution and alcohol between states … control the game,” Easley said. “Who are the interstate licensed distributors? That’s what the product brings to (stores). “

John Schroyer can be reached at [email protected]

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