The median size of cannabis mergers and acquisitions transactions is increasing steadily as the global marketplace undergoes its rapid, early-stage consolidation. In 2017, the median transaction across the U.S. and Canada clocked in at $2 million. The next year, $6.2 million. So far, 2019 projections are holding steady at $15.3 million, according to a recent investment pitchbook published jointly by the MGO | ELLO Alliance, Fox Rothschild, Poseidon Asset Management and MAZAKALI.
(Average M&A transaction sizes are expected to balloon from $77.8 million in 2018 to $111.4 million in 2019, according to the report.)
So, where’s all this money coming from?
“More frequently, in what you’ve seen publicly reported, a lot of the smaller companies are getting acquired by companies that are listed on Canadian exchanges,” Fox Rothschild attorney Joshua Horn says. “Unless and until we have real federal reform in the U.S., where you have a significant opening of the financial markets, I think you’ll continue to see that trend of smaller companies looking [to companies publicly traded in Canada] for a liquidity event.”
Cash may be king in traditional business environments, but it’s Canadian stock transactions that are fueling much of that M&A growth in the U.S. With no formal pathway to traditional banking (outside of the few credit unions willing to work with cannabis businesses) and no chance for plant-touching businesses to list on U.S. stock exchanges, cash-strapped U.S.-based cannabis companies increasingly are turning to publicly traded Canadian producers for capital—often in the form of stock equity that can be converted to cash down the road.
And the road goes both ways: Canadian companies are flush with capital, and management teams from British Columbia to Nova Scotia want to get in on what promises to be an absolutely lush U.S. consumer marketplace once some form of federal legalization is in place.
Attorney Jonathan Storper, with Hanson Bridgett LLP, says he met with a Canadian client this past summer who was eyeing a cannabis cultivation facility in the U.S. Storper walked the client through the attendant financial risks of the cannabis industry, but the prospective buyer was adamant: “‘We need to get into this market," Storper recalls him saying. "Every day we're not in the market is a day when we're not participating.’” Storper also facilitated the sale of California cannabis company MMAC to DionyMed Brands Inc., a publicly traded Canadian cannabis brand that’s been raising funds and picking up U.S. assets. The deal, which closed in July, included $13 million in cash and $6 million stock.
The race is definitely on.
“I get the sense that, even though there are risks out there, people in this industry are obviously willing to take greater risk than … other industries,” Storper says. “They just want to be in the market. There may be ambiguities and greater risks in this industry, and businesspeople seem to understand that, [and] they're willing to participate anyway because the California market [as an example] is just so big.”