Last week, two cannabis giants struck a $3.4-billion deal: Canadian producer Canopy Growth announced that it has purchased the rights to acquire U.S.-based multi-state cannabis operator Acreage Holdings, contingent upon the potential U.S. federal legalization of cannabis.
This billion-dollar international M&A deal is on pace with what Adnant Consulting CEO Sabas Carrillo calls the year of the megamerger. The past couple years have had major themes in the cannabis space, he says. 2017 saw a focus on consolidation—consolidation of retail businesses and licensed producers entering the U.S. from Canada—which allowed big retail to emerge. 2018 saw big retail going public. And now, in 2019, the theme is megamergers, like the Canopy-Acreage deal.
“We’re seeing a lot of medium- and large-sized companies in cannabis talking about or in the process of merging with other medium and large companies that are not public,” Carrillo says. “In the general sense, that’s the megamerger.”
Larger publicly traded companies have been focused on building out infrastructure over the past year or so and will be well-positioned to launch acquisition plans in 2019, he adds. California will be a likely target; multi-state operators with a presence in the East Coast and Midwest may use that as leverage to merge with California companies.
“I’m going to be able to say, ‘You have a large presence here in California. I’m in nine other states, and I just won a bunch of licenses in these five other states,” for example, and use that as leverage, and that’s going to be a major basis for these megamergers,” Carrillo says.
Strong corporate teams will be another driving force behind the emerging megamergers in the space, he adds. Larger publicly traded companies and multi-state operators have been focused on a land grab, acquiring other companies to gain licenses and permits to expand their footprint. Meanwhile, smaller companies have built out strong boards of directors and corporate teams. Merging infrastructure with leadership will be a perfect M&A match, Carrillo says.
“Those companies are really well-suited to go and acquire some of these other larger companies that are lacking at the corporate team and infrastructure level,” he says. “Those are going to be perfect marriages for each other.”
Another trend to watch this year is the continued focus on vertical integration, Carrillo adds, which will eventually give way to hyperspecialization.
“We hear that all the time—companies that want to [operate] from cultivation to all the way to the package and the retail,” he says. “If you think about how major industries’ lifecycles go through, it typically starts as a nascent industry and you have … growth of the industry, then you typically have the explosion of the industry, then you have companies begin to acquire each other, consolidation, and then what they call vertical integration.”
The cannabis industry is currently in the beginning stages of vertical integration, Carrillo says, and companies should set their M&A sights accordingly.
“If you’re a smaller company and you’re thinking about these trends in 2019 and what’s happening and you want to position yourself, you ought to be thinking about what stage the industry is in,” he says. “If you’re nowhere near vertical integration, don’t go compete there—you don’t have to. You can position yourself and be ready for when hyperspecialization happens because it definitely will—all industries follow that path.”
Large brand acquisition deals are also likely to emerge in 2019, Carrillo adds. Prices of unbranded flower have been dropping and consumers are migrating toward branded products, he says, which is incentivizing companies to develop strong brands and propelling brand acquisition.
“There are companies that are out there that have organized themselves and tell their story just around being a brand,” Carrillo says. “This is not retail, this is not cultivation. This is: I walk into a dispensary and the product that I use at this dispensary is also available at 50 other dispensaries, whether that’s branded flower, … a branded vape pen, or … branded edibles. I think that in 2019, we’re going to start to see these brands emerge as powerhouses and be sought after by the larger publicly traded companies and large private companies, as well.”
Brands will likely be valued like dispensaries, as a multiple of revenue, Carrillo says, but brand acquisition deals will be more forward-looking since many brands lack significant traction in the market or an extensive operating history. Brands that have been around for a few years and that have larger, multi-state footprints will be most valuable, he adds.
“Those brands are going to be perceived as extremely valuable in 2019,” he says. “Also [important is] the number of retail stores that they’re in, if they have their own back-end distribution and logistics sorted out, … if they have some type of national footprint, and … the perceived reach that they have—what their client base is. If I’m thinking about selling, I better be focused on those metrics, so to speak."