“Cash is king again” as consolidation heats up

By Alex Halperin
Feb 2, 2021
(Photo by Spencer Platt/Getty Images)

In January, North American cannabis companies raised close to $1B. Insiders widely expect this tidal wave of capital to accelerate the industry consolidation which gained momentum in Q4. 

“I would characterize the climate as very optimistic,” said Sander Zagzebski, a deals attorney at law firm Greenspoon Marder, which has a large cannabis practice. He anticipates Q1 will be “very good,” and the summer to be even better. 

Covid probably boosted cannabis sales, but it also slowed down dealflow. Now amid some optimism that the worst of the pandemic is over, and with the relatively 420-friendly Democrats in power, companies are feeling far more acquisitive. 

In an interview with WeedWeek, Zagzebski discussed how cannabis mergers have changed since the bubble of 2018 and 2019, what buyers want and how the possibility of imminent legalization changes the calculus: 

While significant corporate transactions have only been happening for a few years in cannabis, the current boom is the second round of industry consolidation. 

  • The first began in October 2017, when U.S. liquor company Constellation Brands — parent of Corona beer — acquired a 9.9% stake in Canadian Operator Canopy Growth for US$191. It really kicked into gear in August 2018 when Constellation invested an additional $4B to take a 38% stake in Canopy at roughly seven times the previous valuation.
  • The following December, Marlboro cigarettes parent company Altria invested $1.8B in Canadian company Cronos Group.
  • In 2018 and 2019, a raft of U.S. operators went public on Canadian exchanges, catalyzing acquisitions paid largely with shares of soaring pot stocks.
  • After the market dropped in 2019, several deals, including MedMen’s proposed $682M acquisition of PharmaCann collapsed. 
  • Zagzebski described the period as “a bit of a landgrab.”

The climate has changed, Zagzebski said. Now, he says, buyers scrutinize their targets more closely, rather than buying “whatever you can get your hands on.”

  • With plenty of examples that cannabis businesses aren’t licenses to print money, there’s “much more attention being paid to the synergies, the economics and fundamentals,” he said.
  • Among buyers, for example, he described a “healthy enthusiasm” for operators with licenses in capped-license states, since they face less competition and be more attractive businesses.
  • In unlimited license states, he said, buyers are warier. “An enormous amount of consolidation needs to occur for [California] to be a healthy market,” he said. “It’s going to happen, almost by a force of gravity,” but look for buyers to receive more favorable terms 
  • Even with top U.S. MSOs’ stocks on a tear since March, Zagzebski said, “Cash is king again.”

The deal climate is unfolding as top Congressional Democrats call for the end of federal cannabis prohibition. 

  • This week Senate Majority Leader Chuck Schumer (D-N.Y.) along with Sens. Ron Wyden (D-Ore.) and Cory Booker (D-N.J.) announced a push to federally legalize.
  • Some observers believe a sudden end to prohibition isn’t the preferred outcome for leading MSOs, since it would shorten their runway before they have to compete with or be acquired by far larger players in alcohol, tobacco and pharma. 

According to this line of thinking, MSOs’ top priority is a bill that would give them access to the financial system without legalizing federally. This enables them to be the big fish in a federally illegal market barred to mainstream companies. 

  • For potential acquirers, Zagzebski said, the relevant questions are less about if legalization will happen than than when and how. 
  • If buyers think Congress will legalize this year, it might make sense to eye the bigger, and better managed MSOs. 
  • If there’s the protected market created by prohibition has a few more years, smaller, less-established companies become more attractive targets. 
  • “That’s what everyone is thinking about whether they express it or not,” Zagzebski said.
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