Cannabis mergers and acquisitions (M&As) offer marijuana-focused companies, especially small businesses, the opportunity to consolidate efforts with other brands and meet increased consumer needs.
However, M&A deals are challenging before and after closing. This guide offers expert insights into the dynamics around such deals to help investors understand how they work and their effects on the broader cannabis industry.
Historical Context and Current State of Cannabis M&A
Though the cannabis industry is still shaping up, M&A is not a new concept among active players. The first merger between publicly-traded cannabis businesses happened when Canopy Growth acquired Bedrocan Cannabis in 2015.
Since then, the industry has experienced numerous consolidations, especially in the United-States and Canada.
However, due to the constant decline in the valuations of marijuana-focused companies on account of reduced growth, inconsistent demand, and crashing of wholesale prices, M&A volume has decreased.
It’s important to note that these issues in the American cannabis industry are a result of many challenges, including strict regulatory landscapes and financial limitations. The recent failure of the SAFE Banking Act in the Senate has also hampered the industry’s path to the Scale stage.
For instance, in 2021, the American marijuana industry experienced a record-breaking number of mergers and acquisitions. But the total year-to-date volume of M&A dropped by 62% in 2022 compared to the previous year, with 39% fewer consolidation transactions. A further look at the consolidation curve below indicates the marijuana industry’s present stage.
- Opening: The first stage with a single start-up dominating the market.
- Scale: Major players buy up competitors to form bigger enterprises.
- Focus: Companies expand their primary businesses aggressively to outperform their competitors.
- Balance and Alliance: Large enterprises form partnerships with their peers to consolidate their long-term growth efforts.
Based on the consolidation curve, the global cannabis industry is in its Scale stage. In other words, the industry is experiencing a decent number of M&As that allow bigger players to get more market share by buying out smaller companies struggling to survive the market realities.
The Impact of Economic and Legislative Challenges
Though economic hurdles have negatively impacted the cannabis industry and slowed down its growth, legislative challenges are also significant factors impacting the American marijuana industry.
On the economic side, the global recession and decline in consumers’ purchasing power have significantly affected the demand for cannabis and marijuana-infused products. In other words, the demand for the medicinal and recreational use of marijuana has reduced due to consumers’ economic struggles.
From the investment angle, the continuous increase in the interest rates by the U.S. Federal Reserve makes borrowing and debts more expensive for businesses. With the continuous rate hikes, businesses with loans get their bottom line affected, while others are discouraged from getting loans from banks and financial institutions.
Legislative issues like the criminalization of cannabis cultivation and consumption by the U.S. federal government are other significant challenges impacting the country’s marijuana industry.
Though over 30 American states, including Colorado, Arizona, Massachusetts, and Washington, have varying laws that legalize the use of cannabis for recreational or medicinal purposes, the federal government’s position is a significant drawback to the industry’s growth.
On top of that, various legislative reforms aimed at supporting the industry have either failed or been stalled. For instance, the SAFE Banking Act, which is aimed at providing federal regulatory protection to allow financial institutions to service sanctioned marijuana businesses, has failed at the Senate three times.
Spotlight on 2023’s Cannabis M&A Landscape
Despite M&A deals dipping since 2022, there have been some movements in the marijuana space this year. We’ve seen a decent number of cannabis ventures merging or acquiring one another to become more notable brands. We highlight some of the biggest 2023 cannabis M&A deals below.
TPCO Holding Corp and Gold Flora
In February 2023, The Parent Company (TPCO Holding Corp) announced its all-stock merger with Gold Flora. TPCO is renowned in the California cannabis market for its dominant portfolio of various house brands, comprehensive state-wide coverage, and multiple retail stores.
The M&A deal was projected to help the company save between $20 to $25 million per annum.
TerrAscend Group acquired Blue Ridge Wellness and Herbiculture Inc.
In June 2023, Canada’s tier-1 cannabis company, TerrAscend Group, acquired Blue Ridge Wellness and Herbiculture to expand its strength in the relatively new Maryland market. The Blue Ridge Wellness deal cost $8.25 million, while the Herbiculture Inc. deal was around $7.7 million.
Both deals were relatively small, but they helped TerrAscend get a better market share of the Maryland marijuana market.
Planet 13 Holdings and VidaCann LLC
Another notable M&A deal that happened in the American marijuana industry in 2023 was between Planet 13 Holdings and VidaCann LLC in August. The massive deal saw the former acquiring the latter for $48.9 million to expand its Florida marijuana operation.
These mergers and acquisitions are a testament to the fact that enterprise-level cannabis companies still consider the emerging industry a solid market, especially as the industry anticipates friendlier laws.
The Role of Distressed Assets and Rescue Financing
Some of the ways smaller cannabis companies are navigating the challenging economic landscape include selling distressed securities and opting for rescue financing options. Distressed assets or securities are a company’s financial instruments that it sells at a lower valuation when it is near or experiencing bankruptcy.
Usually, these assets experience low demands due to market volatility, resulting in many cannabis companies selling their shares below their initial market valuations to adjust to the current industry economic landscape.
Such assets are attractive to investors because of their future potential. Investors can take advantage of their lower prices and make potentially significant profits in the future, and businesses can find alternative ways to generate revenue.
On the other hand, marijuana companies that are struggling financially can leverage rescue financing options to protect their businesses from bankruptcy. U.S. states like California have stimulus packages and financing options for marijuana-focused firms. These include loans, grants, and tax credits to support small businesses at economic disadvantage.
Such financing opportunities can help small and mid-sized cannabis businesses stay afloat while navigating the challenging economic realities of the marijuana industry, especially at a time when it’s difficult to access legalized financial support from traditional banking service providers.
Predictions for Cannabis M&A in 2024 and Beyond
There’s a lot to look forward to in the cannabis M&A space in 2024. Based on existing market trends, many marijuana companies seeking funding are expected to find limited and costly financing options. Though investors are expected to continue entering the marijuana industry, it’s likely going to be at a slow pace.
As such, market analysts believe M&A deals will continue as stronger marijuana businesses aim to get more market share by scooping up distressed assets for less money. At the same time, the bigger brands can cut operational costs by acquiring more ancillary businesses than plant-touching companies with higher operational expenses.
In other words, plant-touching cannabis companies will find it more challenging to get funding, while biotech companies and businesses with marijuana-infused products and extracts will attract more investors and mergers.
However, next year will be an all-important presidential election that will see the industry have some bumpy rides. Conversely, the year may also usher in friendlier legislative frameworks that will transform the cannabis industry, especially at the federal level.
The regulatory changes will inspire more investments in the industry, improving the overall market sentiment. But only time will tell what the future holds, as all the expert predictions are speculative.
Strategies for Success in Cannabis M&A
As the cannabis industry continues to evolve, it’s essential that small business owners leverage the opportunities that M&A deals offer. Several trends are crucial to the future of mergers and acquisitions in the cannabis industry, so you want to strategize for success using such trends.
Consolidation With Multistate Operators (MSOs)
Many multistate operators in the industry run their businesses in multiple states across the medical and recreational marijuana markets. Small and medium-scale businesses can band together with MSOs via M&A to trim operational costs and reinvent themselves. For instance, a deal with top-tier multistate companies like Verano Holdings, Tilray Brands, or Green Thumb Industries Inc can help improve profits and reduce expenses.
Vertical integration is another option to consider to make the most of the opportunities in the cannabis industry. With vertical integration, businesses can own every part of the marijuana supply chain, including clones and retail locations. This makes it easy to streamline costs from seed to sale.
However, the vertical integration process is expensive and may not be right for small companies. M&As provide opportunities to combine multiple types of cannabis businesses and create a robust pipeline.
Expansion into New Markets
New regulated cannabis markets usually outperform existing ones because they are more appealing to investors and businesses looking to enter M&A deals. So, another strategy to leverage in the M&A space is entering new markets where legalization and financing are not drawbacks.
For instance, with potential policy changes in Europe and existing regulatory frameworks in Canada, American cannabis companies can use M&As to partner with established international marijuana companies and get easier routes into new markets instead of building from scratch.
With many challenges around accessing funding in the cannabis industry, small and mid-sized cannabis businesses are providing alternative ways for the sector to thrive during a crucial period of market correction. Experts expect more mergers and acquisitions in the coming year, as small businesses struggle to stay afloat.
At the end of the day, it’s all about the cannabis license at the federal level. With country-wide regulation, cannabis retailers can enter new markets, find regulated financing options, and resuscitate investors’ interest in cannabis stocks and other securities.
While it may be a good time to enter the market and acquire marijuana securities at low prices, it’s crucial for investors to stay updated on market trends and do due diligence before committing funds to any cannabis asset.