Cannabis Goes Shopping

Is the cannabis market expecting a rebound in M&A activity?

Deals Deals Deals

Cannabis has really seen its ups and downs over the last few years. 2018 was the peak year when many cannabis companies went public, raised hundreds of millions of dollars, and utilized their elevated stock price as an acquisition tool.

Once the FOMO was wearing off in late 2018, 2019 M&A transactions slowed down to just 249 from the prior years 324, a 23% decline.

COVID-19 Impact

Given the events that occurred in 2020, the number of deals was cut in half, but the total transaction volume fell off a cliff to just $615mm from ~$5bn the previous year.

This doesn’t count the $4 billion reverse merger between Aphria and Tilray Inc. TLRY 0.00%↑.

Cresco Labs Inc. (CRLBF) closed a $900 million deal to buy Canadian cannabis company Origin House.

Another big deal with Canopy Growth Corp. CGC 0.00%↑ coming to terms with Acreage Holding — but this deal turned out to be more of a partnership than a true merger.

Though not all M&A stories end well, as many of my banker friends reading this can attest to. Sorry to bring up flashbacks.

You’ve Been Terminated

Cheesy, I know, but the point still stands.

In 2019, 92 deals in the cannabis industry were terminated and the transactional value of those deals was more than $2.2 billion — one of the biggest was Cresco backing out of buying Tryke Companies.

This was the year when many of the planned acquisitions via stock came crumbling down as many public companies saw their share price contract significantly.

I myself had many cannabis M&A transactions fall apart because of share price deterioration leading to more dilutive of a stake post-deal, hence why they fell apart.

2021 Revitalized

Despite the slowdown during COVID, 2021 seems to be on track for another banger of a year in transactions.

Just in May, there have been several substantial merger announcements in cannabis.

• Hexo Corp. HEXO 0.00%↑ just announced last week its $768 million acquisition of Redecan — a privately owned licensed producer in Canada.

• Curaleaf Holdings Inc. (CURLF) is getting one of the largest outdoor cultivation facilities in the U.S. by acquiring Colorado-based Los Suenos Farms for about $67 million.

• Trulieve Cannabis Corp. (TCNNF) announced a $2.1 billion acquisition of Harvest Health and Recreation, a Florida-based brand.

• GrowGeneration Corp. GRWG 0.00%↑ has announced nine different acquisitions in 2021, according to Cannabis Business Times.

Of course, 2021 kicked off with Ireland-based Jazz Pharmaceuticals PLC (JAZZ) signing a $7.2bn deal to acquire British pharma company GW Pharmaceuticals PLC (GWPRF).

Just this week, both Village Farms VFF 0.00%↑ and Tilray TLRY 0.00%↑ announced new deals of their own.

Village Farms Acquires Balanced Botanicals

Village Farms enters into the CBD market by acquiring Balanced Botanicals for $75M. Balanced Health owns and operates one of the largest brands in the hemp-derived cannabidiol (CBD) market in the United States, providing Village Farms with immediate entry into the US CBD market in a consumer products category adjacent to the high-THC cannabis market, as well as the broader consumer packaged goods (CPG) wellness arena.

While many acquisitions can be dilutive, not all, until long-term strategy gets recognized, this deal adds to their bottom line. Balanced Health is a profitable business and the acquisition is expected to be immediately accretive to net income.

Tilray Buys $166M of MedMen Convertible Notes

Canadian pot producer Tilray last Tuesday said it will buy convertible debt of struggling U.S. rival MedMen Enterprises Inc's for about $166 million in a deal with partners, giving it a pathway to enter the United States.

Why this Tilray deal matters

For those of you that don’t know, due to U.S. federal laws classifying marijuana as an illegal drug, companies not based in the country can not directly own a U.S. weed business. However, the Biden administration has promised reform, making Canadian producers hopeful they could operate in the country soon.

By buying convertible debt and warrants - which can be changed into shares later - Tilray gets the option to take a "significant equity position in MedMen... following U.S. cannabis legalization", it said in a statement.

Tilray said it purchased about 75% of MedMen's outstanding convertible notes and 65% of its warrants in partnership with other strategic investors. Its share will equate to about 21% of MedMen's outstanding Class B shares, it said.

MedMen has 25 retail stores in key states including California, Los Angeles and Las Vegas, and it should be able to get to 30 stores by the end of the year.

As more legalization starts to occur, I believe that we’ll start to see more Canadian-based companies make moves on smaller American players to gain quick access to distribution.