With the US quickly rising to become the center of the cannabis investment universe, could the market see an increase in merger and acquisition (M&A) activity? 

Multi-state operators (MSOs) have come a long way from their early days, and this year potential M&A among MSOs is receiving more attention from a hungry investor base looking for exposure to the US market.

The Investing News Network (INN) spoke with a collection of experts about what the M&A appetite may be for the MSOs, and how this activity could affect the development of the US cannabis marketplace.


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Policy talks reinvigorate investment rush for US cannabis opportunities

The US is in a tricky position when it comes to cannabis policy. At the federal level, the drug remains illegal thanks to a Schedule I designation as part of the Controlled Substances Act.

However, a number of states have moved forward with legalization programs despite that barrier, allowing the implementation of cannabis marketplaces as a way to generate reliable tax income.

Not every market is the same, though. Some states have elected to open only medical distribution, while others have gone on to offer recreational options after medicinal availability has taken over.

That’s where cannabis MSOs come in. These companies have secured assets and licenses to serve US state markets, and they have gained support from investors thanks to public listings in Canada on the Canadian Securities Exchange (CSE) and the NEO Exchange. Unlike Canada’s TMX Group (TSX:X) operated exchanges, the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSXV), the CSE and NEO allow MSOs to list even though cannabis remains federally illegal in the US.

Though it’s progressing slowly but surely, America’s state-by-state rollout has resulted in a fractured landscape for the entire US marketplace. And while there are benefits to the current model as it stands, experts believe it’s clear some kind of federal policy is needed.

With that in mind, the cannabis industry has been looking forward to attention from Washington, and officials have warmed up to the notion of engaging with cannabis policy at some level. Thanks to Joe Biden’s move to the White House, discussions have started brewing about the possibility of meaningful new federal cannabis policies appearing this year.

Whether or not that will happen remains unclear, and the current wait-and-see situation when it comes to a timeline for policy changes has left experts calling for caution when it comes to MSOs.

Even so, Nawan Butt, portfolio manager with Purpose Investments, told INN he is seeing the larger MSOs shift from pursuing profitability to looking for growth given the “imminent change that they anticipate happening on a federal basis,” and the implications of these changes for the type of players entering cannabis.


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Butt, who oversees the Purpose Marijuana Opportunities Fund (NEO:MJJ), pointed to the recent acquisitions of Bluma Wellness (CSE:BWEL.U,OTCQX:BMWLF) and Liberty Health Sciences (CSE:LHS,OTCQX:LHSIF) by Cresco Labs (CSE:CL,OTCQX:CRLBF) and Ayr Strategies (CSE:AYR.A,OTCQX:AYRWF), respectively, as proof of his theory.

“What MSOs are essentially trying to do is get ahead of the floodgates opening up, because when a federal decriminalization of sorts happens … everybody can sort of come and establish themselves in the space,” he said.

“Everybody” refers to big-name corporations from the pharmaceutical, tobacco and even alcohol sectors with an interest in cannabis.

“(MSOs are) trying to get ahead of that very large swath of capital that could take away their competitive advantage,” said Butt. “They’re turning to full on growth mode right now.”

The hunt is on, what kind of assets will be targeted?

As investment interest shifts onto the US market and its operators, what kind of needs do these companies have at the moment?

According to Kacey Morrissey, New Frontier Data’s senior director of industry analytics, the intentionality of US operators is shifting as well.

Morrisey said while at first MSOs were in a competition to grab as many licenses or land facilities as possible, now strategic positioning has come into the fray.

Charles Taerk, president and CEO of Faircourt Asset Management, told INN the major differences between state markets have made the MSOs become more cautious with their M&A strategies as they expand into new markets.

Taerk, who manages the cannabis-heavy Ninepoint Alternative Health Fund, said MSOs are looking at states in which they don’t yet have assets. “They’re making an estimate on the relative strength of the different state markets. Because not every state is the same,” he said.

Given the differences in the state markets, said Taerk, who co-manages the Ninepoint Alternative Health Fund, the MSOs have to consider different approaches for entry.

He compared Pennsylvania and Texas — the two states have medical cannabis programs, but the southern state is lagging behind in the amount of patients available to purchase products.

“Pennsylvania has a very extensive list of allowable indications for medical cannabis and has close to 450,000 patients,” he said. “That’s why you’re seeing a significant focus in a state like Pennsylvania versus Texas.”


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The operators then have to consider state landscapes and potential future development, including the possibility of recreational sales becoming an option.

Taerk said he has noticed more MSOs moving to the M&A strategy of buying single-state cannabis operators as a way to increase their positions in a designated state. “Everybody’s reaching out to acquire footholds in those growing strong medical markets,” he told INN.

Morrissey added that disruption can lead to changes in opportunities for M&A. Due to the effects of the COVID-19 pandemic, she explained, cannabis operators were forced to urgently look at their technology to develop solutions for consumers who couldn’t go into dispensaries.

“We’re seeing not only the landscape of the national market change itself, but the types of operators and their strategies to operate within the changing landscape have been fascinating,” Morrissey said.

Could CPG deals actually be on table for US operators?

With the increased attention on the potential for political change in the US, one financial expert told INN there are sure to be investment deals or full on M&A related to a big-name consumer packaged goods (CPG) firms.

These types of investments are not new for cannabis at large, but a US-based cannabis company getting the backing of a CPG name brand would require policy changes from the country.

According to Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares, the MSOs on his radar are preparing for these eventual changes in policy.

“(MSOs) are anticipating those walls coming down … All the MSOs that I’ve talked to are focused on executing right now,” he said. Ahrens manages the AdvisorShares Pure Cannabis ETF (ARCA:YOLO) and the recently launched AdvisorShares Pure US Cannabis ETF (ARCA:MSOS).

When asked what could make an MSO stand out in the eyes of a big-name corporation, Ahrens said it is a fool’s game to try to predict the outcome of acquisition deals like these.

“It also depends on the desires of that company, there are companies out there that don’t want to be purchased,” he said. “We do know a lot of those conversations are happening.”

Investor takeaway

The scales have quickly changed for US operators, and 2021 seems poised to prop them up into an even stronger spotlight, both for investors and potential M&A partners.

The attention on the development of the US cannabis states marketplace, which for the time being means MSOs exclusively in the open market, will be at the top of mind for investors and experts alike.

Don’t forget to follow us @INN_Cannabis for real-time updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.


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Cannabis Market Update: Q3 2020 in Review

Click here to read the previous cannabis update.

During the first few months of investment time in 2021, cannabis faced some volatility alongside optimism about federal changes in the most important market for the drug.

The cannabis business found its stride during Q1 thanks to policy change signals and consolidation.

To find out more, the Investing News Network (INN) asked experts about progress in the market during the first major period of the new year, and which developments investors should watch out for.


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Cannabis market update: New York and US potential boost operations

New York state’s legalization of recreational cannabis was a huge Q1 announcement that added pressure to the federal government when it comes to cannabis policy, said George Mancheril, co-founder and CEO of Bespoke Financial, a debt financing business with a particular focus on servicing cannabis businesses.

“It’s going to add to the chorus of voices in the federal scene to basically move sooner rather than later,” he explained to INN.

Following the US election in 2020, the momentum for cannabis businesses went on the upswing, as did company valuations, with the idea of expansion at the heart of it all, according to Mancheril.

Before starting Bespoke Financial, Mancheril learned from traditional investment banks, where he worked on lending, fixed income and debt markets with Goldman Sachs (NYSE:GS) and Guggenheim Partners.

Nawan Butt, portfolio manager with Purpose Investments, agrees with Mancheril. The financial expert told INN the ongoing legalization process seen in the US market is leading to expansion.

“It’s becoming more of a national move, then small pockets of proliferation. That’s very exciting about cannabis right now,” said Butt, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ).

This proliferation effect is causing a change in valuations and enthusiasm for US-based operations. Mancheril told INN that by the end of Q1, multi-state operators (MSOs) had raised approximately US$3.3 billion.

The cannabis lender said he sees the industry as having grown from the woes of 2019; it is now seeing a return to form by way of the excitement for an ongoing opening process in the US.

The expert explained that there is likely to be a windfall of capital in the wake of major federal changes for cannabis policy, although the timeline for these changes is becoming increasingly hard to predict.

Leading up to that capital influx, Mancheril said he wants to see operators really drill down on the value of desired assets and whether they make sense.


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“What I’d hope is that we continue to see bullish sentiment, but with some measure of responsibility, and let’s not just get over ahead of ourselves,” Mancheril told INN. “The idea is let’s minimize the volatility and continue growing responsibly.”

As far as struggles go, Butt explained that the cannabis industry has cemented itself as a growth-type sector, and as such there are macro environment pressures affecting the way these assets operate.

“We’ve seen this preference for cash flows at growth in the current or in the near future, rather than in the far future, and that’s what we’re seeing as far as valuations go in the broad market,” Butt said.

Cannabis market update: Volatility continues to rule as industry foundations build

Despite the industry’s current potential and the growing pains it has gone through as a whole in both the US and Canada, volatility remains a key factor in the cannabis investment scene.

Butt explained that the current shareholder base, which is dominated by hedge funds and retail investors, still lacks enough institutional support to avoid the day-to-day volatility cannabis has come to be known for.

These two investor groups, Butt said, can be easily spooked and excited by the news of the day when it comes to their investments.

“A lot of these institutions’ strategies are not about short-term profits, but they’re about long-term sustainability of the businesses themselves,” Butt said.

“That’s why you see a lot of volatility in the space, and that’s essentially what we’ve seen over the past, I’d say, three to two months as well,” he added.

That means investors shouldn’t expect an end to volatility anytime soon.

“It’s not about whether we continue to expect volatility, because we do,” Butt said. “We really think that the volatility will be taken out when the shareholder base becomes more institutional, but it’s really about understanding why there is volatility in the first place.”

Cannabis market update: Canadians talk up US business potential, but questions remain

A surge of mergers and acquisitions has taken over the Canadian cannabis sector recently as more producers see potential in America.

One of the biggest announcements in this regard came when Organigram Holdings (NASDAQ:OGI,TSX:OGI) secured a C$221 million investment deal from British American Tobacco (NYSE:BTI,LSE:BATS).

Using the funds, the two will work in tandem to develop new branded products designed to work on the international stage, including in the US. Organigram CEO Greg Engel previously told INN that the US represents a critical opportunity for Canadian companies, but the entry point isn’t as clean as it could be at the moment.


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While the long-term potential may be exciting for investors, Butt told INN he’s still unsure how the approach will work for Canadian companies.

The Purpose Investments expert said there will be plenty of space for the biggest Canadian names to pursue US market entries, beyond the initial hemp-derived CBD moves some operators have mde, since the US represents the biggest market in the world.

“But there’s just way too many unknowns right now to say exactly what that participation is going to look like, or when that participation will happen,” he said.

“What we do know is that currently the US MSOs are in a wonderful sort of position to expand on their market leadership that they have. And it will be tough for Canadians to come in and compete with them,” Butt said.

Canadian players still retain the upper hand at times in terms of valuation, which is confusing for both Butt and Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares.

“The performance in quarterly earnings of US companies has been rather spectacular. They’ve knocked it out of the park in most instances,” Ahrens told INN.

Butt praised the recent performance reports from MSOs across the board, pointing to year-over-year growth lines and projections for continued positive performance.

In his view, share prices still don’t reflect company value. “Those are really being discounted at this point,” Butt told INN.

“We’ve seen the Canadian licensed producers be really hot stock performance-wise, outpacing the US (MSOs), and I’ll say it’s rather nonsensical to me,” said Ahrens, who oversees the AdvisorShares Pure Cannabis ETF (ARCA:YOLO) and the recently launched AdvisorShares Pure US Cannabis ETF (ARCA:MSOS).

Cannabis market update: Investor takeaway

The cannabis investment proposition finds itself at an interesting moment in time, as the entire sector eagerly awaits confirmation in the US at the federal level.

While for the Canadians waiting on the sidelines, this development may feel like a major necessity to address current financial struggles, for US-based operators, the heat around the corner could represent an increase to their already thriving operations.

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