We have been writing in the latest issues of the EDGE Briefing about the role SPACs are likely to play in the avalanche of M&A transactions that are, from all reports, predicted to happen this year. It’s official now that while the pandemic slowed projected M&A transactions to a snail’s pace in the early part of 2020, Dealogic reports that as of the beginning of December the total of U.S. M&A deals totaled over $915B. The investment banking community sees this as a sign of the deal-making frenzy already beginning in 2021. Election Results Finalized Cannabis Wins BIG
(in fact, click here to see the article at the link for our first cannabis M&A deal close of the new year:)
The Election’s Biggest Winner
The election results could not have been better for the prospects of a wealth of M&A transaction in the cannabis industry. With all three branches of government under control of the Democrat Party the pace of decriminalization, if not national legalization, will be hastened. At the state level in November, Arizona, Montana, New Jersey and South Dakota all passed measures legalizing adult recreational use – medical use in South Dakota as well. This brings the total up to 36 states and the District of Columbia with comprehensive medical marijuana programs with 15 of those state and DC having legalized adult recreational marijuana use. With all states hurting for revenue as a result of the pandemic, that action by the New Jersey voters to endorse adult use is likely to increase the urgency for recreational marijuana legalization in Pennsylvania, Connecticut and Virginia; with Governor Cuomo taking a highly publicized stance on legalizing adult use in New York. Election Results Finalized Cannabis Wins BIG
There are many predicting that historic reforms of Federal cannabis laws will happen quickly on the heels of the election results. Ben Cahill, COO of Pure Jamaican, a company on a mission to become the world’s leading supplier of competitively priced, precision cannabinoid active pharmaceutical ingredients, states it this way:
“The Democrats control of all branches of government now puts a timeline for Federal cannabis legalization in the US within 2 years of Biden taking office. The reason a 2-year time frame is key, is that two years into Biden’s Presidency there will be midterm elections for the House and the Senate. There is a risk that the Democrats could lose control of either the House and / or the Senate, making legalization efforts more challenging. To eliminate this risk, the Democratic Party will push through cannabis legalization in the first two years of Biden’s Presidency.
This is an incredible moment to enter the cannabis industry. Once Mexico and the US legalize, the three largest cannabis markets on the planet will all be neighbors – Canada, US, and Mexico. Mexico will be a huge winner as companies in the US will outsource manufacturing of finished goods to Mexico for import to the US in addition to Mexican companies servicing their own domestic market.”
The company sees being set up to handle the pharmaceutical as well as cannabis demand for high quality products in both the U.S. and Mexico markets as a distinct advantage.
As a minimum, analysts are expecting some version of the act entitled Strengthening the Tenth Amendment Through Entrusting States (STATES) Act to be passed in relatively short order. While this Act does not legalize interstate commerce in cannabis it does officially sanction the legitimacy of state cannabis legislation. Election Results Finalized Cannabis Wins BIG
Dry Powder and M&A Activity
Why the enthusiasm about the M&A potential in cannabis? Well, consider that there are a growing number of multi-state operators (MSOs), nine to be exact, that have market caps of over $1B, with more MSOs potentially reaching this level, and all with enough dry powder to more rapidly realize revenue through M&A deals than they could achieve through organic growth. Recent examples:
- Cresco Labs acquired Origin House in early 2020
- In December, the Canadian cannabis powers Aphria and Tilray, announced a $4 billion “reverse acquisition” expected to close Q2 to create the largest cannabis company by revenue
- Columbia Care Acquisition of Project Cannabis
- In Pennsylvania, acquisitions have been made by Jushi Holdings, Trulieve and Ayr Strategies
- Ayr Strategies also made acquisitions in Arizona and Ohio
- Grassroots Cannabis acquisition by Curaleaf
- TerrAscend with an acquisition in Maryland
- Verano Holdings acquiring AltMed Arizona and Florida operations
- And, Curaleaf has just announced a $50 million three-year secured revolving credit facility to be “focused on leveraging the rapidly expanding market for U.S. medical and adult-use cannabis, particularly in light of the recent election results…”
Through the painful early market-share-at-any-cost years in the cannabis industry, MSOs are now becoming fiscally structured to act like the successful CPG companies they must emulate to thrive. So, we’re now seeing a focus on strategic acquisitions targeting the distressed assets in the industry. Viridian Research estimates that there is a backlog of undisclosed deals in the U.S. cannabis industry going into 2021 that could be a much as $2B. With legalization rolling out across the country in advance of a change in federal legislation, and with obstacles in the way of Canadian companies entering the U.S. market, U.S. MSOs are poised to be the leaders in taking the industry to the potential that New Frontier Data projects – $35B by 2025.
With 36 states and the District of Columbia with comprehensive medical marijuana programs and 15 of those state and DC having legalized adult recreational marijuana use. With the pandemic putting revenue strains on other major states that will also likely take the route of legalizing adult use. With a Congress and Administration pledging cannabis reform. With MSOs estimated to have $1B in dry powder, along with an estimated $2B worth of M&A deals in the works. And, most significantly, with major players now focused on strategic acquisitions, efficient operations and EBITDA, 2021 is shaping up to be a banner year for the cannabis industry. A banner year when an influx of liquidity will boost this formerly cash-restrained industry toward its $35B potential as early as 2025. Election Results Finalized Cannabis Wins BIG
Sorting Through the Right Investment to Meet Your Portfolio Strategy
For our clients, here is the advice we provide as they assess M&A opportunities in the cannabis industry:
- Know what the organization is getting into– Detailed due diligence and proper integration planning are core to identifying potential issues.
- Get the right people involved– Determine essential stakeholders early and get them involved. By doing so, retention and change issues will be minimized.
- Know what the organization wants out of the deal– Determine objective business decision criteria to minimize political issues and the impact of personal preferences.
- Get it done right – Devote the necessary resources even if the company is “running lean.” Transaction execution and integration are together a full-time job.
- Know what success means– Establish a performance milestones measurement process to quantify the success of integration activities.
- Don’t underestimate the infrastructure– The IT function must be an integral part of both the due diligence and integration planning efforts. IT is a critical enabler of all integration efforts.
- Over-communicate– Personnel will be forgiven at first and will not expect to have all the answers. They will, however, expect strong leadership that has a vision and a plan for how to get there, how to blend the cultures of the merging organizations into a compatible, inclusive growth-oriented environment.
What’s It Really Worth?
Election Results Finalized Cannabis Wins BIG
Once it is confirmed that legal/compliance requirements are met then the next major step is conducting a realistic valuation of the merged businesses. Your investment banking advisory should positively understand the idiosyncrasies of the cannabis industry to identify a valuation range that ensures the buyer is not overpaying and that the seller’s proformas are verifiable.
What It Takes to Make It Over the Finish Line
- The Vision of the Parties
- All stakeholders to the M&A transaction must have a clear vision as to the direction toward profitability the marriage of the parties will take. This requires good advice about the fundamental legal and business issues that will arise and the judgement calls that will have to be made during the process to keep a clear vision for the post-closing entity.
- Once the decision is made that a Buyer’s objectives are better served by acquiring rather than taking the path of organic growth, all key management team members must fully buy into that direction regardless of hurdles that will arise along the way.
How we can help
At Highway 33 Capital Advisory we excel at structuring deals to meet client investment strategies in trending segments like Cannabis and CBD/Hemp, as well as our core expertise in highly regulated markets that include: Bio/Pharma, Healthtech, Agtech, SaaS, CleanTech and ancillary tech companies. We provide investors with thoroughly vetted companies looking to drive growth and enterprise valuations through M&A, non-dilutive debt financing and/or capital investments.
Let’s talk about putting the power of this expertise and our network to work for you.