As the potential for US cannabis policy changes grows stronger, companies are looking more closely at mergers and acquisitions.
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.
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.
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.”
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.”
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.