As the US quickly rises 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 their M&A appetite is receiving more attention from a hungrier 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 a 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 allowing the implementation of marketplaces as a way to reverse policy misgivings and generate reliable tax income.

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

That’s where cannabis MSOs come in. These companies have secured assets and licenses to serve US opening markets, and they have gained support from investors thanks to public listings in Canada.

These companies have reached investors through the Canadian Securities Exchange and NEO Exchange, two Canadian-based listing houses that elected to adopt a policy of disclosure to ensure investors were made aware of the risk associated with federal irregularity of cannabis in the US.

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.

When Joe Biden entered the White House in 2021, discussions began brewing about the possibility of meaningful federal cannabis policy appearing this year.

Whether or not that will happen remains unclear, and the current state of unknown when it comes to a timeline for policy change has left experts calling for caution when it comes to MSOs, since there is a wait-and-see effect taking place at the moment.

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

Butt, who oversees the Purpose Marijuana Opportunities Fund (NEO:MJJ), pointed to the recent acquisition deals for 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 for 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) 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 over into 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 the 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 frey.

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

Taerk, who manages the cannabis heavy Ninepoint Alternative Health Fund, said MSOs are looking at the states in which they don’t have assets yet.

“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, two states with medical cannabis programs, but where 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 the landscape of the state and the potential future development of it, 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 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 a dispensary.

“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 he is sure to see an investment deal or full on M&A related to a big name consumer packaged goods (CPG) firm.

These types of investments are not new for cannabis at-large, but US-based cannabis companies getting the backing of a CPG name brand would require policy change 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 and the impact of the event.

“(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 for the developments 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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