Cannabis Consolidation

Late last year, we spent some time outlining what we saw as the trends for the cannabis industry in 2019. We went through a number of them and ended the article with what we believed to be the biggest trend for 2019 – consolidation. We stated, "our final prediction for 2019, is that there will be more consolidation of cannabis companies, this time in the US industry."

And on this one, we nailed it.

The current global cannabis industry is characterised by many small, cottage style players all operating in isolation, given they cannot operate economies of scale and distribute cannabis across state lines.  The bigger players, like those in the food, tobacco, and pharmaceutical industries have mostly stayed on the sidelines, limited by the current legislation and waiting patiently for the winds of change to blow, before deciding how and when to enter the market.

As it stands, cannabis companies that want to expand to other states need to establish growing, processing and selling infrastructure in each new location, or form a partnership with a company in another state. This necessity for vertical-integration places extra emphasis on capital requirements to fund growth. Add to this, the lack of access to banking, and it's been hard for small companies to make this kind of expansion happen.

But while some of the world's largest companies circle the industry (Coca-Cola and Diegeo to name a few), consolidation within the industry has been gaining rapid momentum ever since Aurora Cannabis acquired CanniMed in early 2018.

And the pace certainly quickened from there.

 

May 2018 – Aurora buys MedReleaf for $2.5bn

When the transaction was announced, it marked the largest deal inked in the cannabis sector to date, giving the combined company a footprint that spanned 11 countries with a distribution reach into Europe, South America, and Australia.

Under the deal, Alberta-based Aurora would have the capacity to produce 570,000 kilograms of cannabis a year across nearly a dozen operations in Canada and Denmark. What's also important to note, is that the deal signaled an increased interest in the cannabis industry from major traditional banking institutions. BMO Capital Markets served as the financial adviser to Aurora in the deal, while cannabis industry investment royalty Canaccord Genuity advised MedReleaf.

 

 

We said at the time, that Aurora's purchase of CanniMed, which began in an extremely hostile manner, but ended amicably and with full shareholder approval, created immediate scale in the number of medical patients, and gave Aurora much needed access to oil-based medicinal cannabis.

What the MedReleaf deal gave them, was scale in both production and product range, particularly in Ontario, which is the largest market for both medicinal and recreational cannabis. Both deals have been incredibly successful for Aurora, and credit to the company for managing this "integration" risk. 

Aurora created a special division for just this purpose.  And recruited top gun, Andre Jerome, for the role of Senior VP of Business Integration. The feather in Andre's cap is the fact that he personally oversaw the massive globalisation and integration of multiple entities that ultimately became Vodafone.

 

October 2018 – MedMen acquires PharmaCann for $682 million

The market was still giddy from Constellation Brand's $5 billion investment into Canopy Growth, when MedMen, one of the most recognisable "retail facing" cannabis brands in the world, acquired PharmaCann in an all-stock deal.  It marked the largest cannabis acquisition in the US to date and gave the combined entity access to 79 retail and cultivation licenses across 12 states.

 

"This is a transformative acquisition that will create the largest U.S. cannabis company in the world's largest cannabis market."

– Adam Bierman, MedMen CEO

 

Another critical factor in the outcome of the deal was that it also strengthened MedMen's cultivation and production capacity to just over 800,000 square feet in States that constrain the number of licenses (and hence supply) awarded to producers.

 

November 2018 – iAnthus acquires MPX Bioceutical for $1.6 billion

And finally, in late 2018, iAnthus announced that they were purchasing the US assets of MPX Bioceutical, for a cool $1.6 billion. In a Bulls and Bears weekly coverage report, we noted that the deal was transformational in its nature as it solved a critical issue that each company was individually facing.

For iAnthus, it was their lack of revenue, whereas, for MPX, it was their lack of experience at the management level. iAnthus had a very strong and well-seasoned management team, with excellent access to capital. However, they lacked any real brand presence in the market and had very little revenue to show for themselves.

MPX was the reverse. Light on management experience and with average access to capital, they had a significant brand presence, and associated market share, with their award-winning MPX extracts brand, in addition to significant revenue from their Nevada operations.

 

 

The consolidated entity, which was to operate under the iAnthus brand, would be one of the largest MSO's by revenue, with excellent brand recognition and market share in key recreational states.

In our opinion, this wave of consolidation was definitely going to continue in 2019, and sure enough, we didn't have to wait long.

 

March 2019 – Harvest Health acquires Verano for $850 million

Arizona-based Harvest Health & Recreation entered into a binding agreement to acquire Chicago-based Verano Holdings, in a deal that set a new record for the largest acquisition inked in the U.S. cannabis industry to date.

Upon closing, the all-stock deal with Verano will give Harvest one of the largest footprints among MSO's, with 123 dispensaries in 16 states. What makes these kinds of deals interesting, is that most people didn't even know that Verano existed before this. The point being that right now across the US, there are many unlisted businesses that are pretty big in both reach and size, all ripe for consolidation and acquisition.

 

"The acquisition is the next step in Harvest becoming the largest cannabis company in the world,"

 – Steve White, Harvest CEO

 

Verano, which acquired a Massachusetts cannabis company in February, was attractive to Harvest because it had stakes in 10 operating facilities across the United States and more than 45 licenses under development.

All told, the deal puts Harvest on pace to have more than 70 dispensaries, 13 cultivation facilities and 13 manufacturing facilities operating by the end of 2019, according to a news release from the company.

And just as everyone was catching their breath, cue the next consolidation. Drum roll please…

 

April 2019 – Cresco Labs acquires Origin house for $1.1 billion

Another Chicago-based MSO, Cresco Labs, acquired Origin House (formerly CannaRoyalty) a Canadian firm with a massive portfolio of brands and a major California presence, in an all-stock deal valued at $1.1 billion Canadian dollars.

The deal, which officially marks the largest acquisition in the U.S. of a publicly traded cannabis firm, will boost Cresco Labs' footprint in California, where Origin House is a top cannabis distributor, delivering more than 50 brands to 500-plus dispensaries across the state.

All told, the combined company will boast licenses for up to 51 retail locations and more than 1.5 million square feet of cultivation across 11 states.

"This significantly accelerates our efforts to build the first national house of brands with broad and deep positions in the largest cannabis markets in the country," Cresco CEO Charlie Bachtell said.

Once again, this is a great consolidation. Both companies gain significantly from each other's distribution capabilities. Both companies have in-house products, both of which gain immediate scale. Cresco Labs is currently building a California cultivation facility capable of producing over 80,000 kilograms per annum, and the economic potential of this production is leveraged by utilising Origin Houses' best-in-class Californian distribution network.

 

Back to the future.

Make no mistake, this is not the end, but rather the start of even more consolidation. This is going to happen in three stages. We are seeing the smaller stages happen quite frequently, with the smaller (read more boutique/craft) cannabis producers and hemp specialists are being bought up by the raft of Canadian Licensed Producers and some of the MSO's. Examples include Aphria's purchase of Broken Coast and Aurora's purchase of Whistler.

The second stage, (which has already begun) sees the larger Licensed Producers and MSO's start to acquire each other. This will continue on in 2019, and we are definitely going to see the "largest acquisition" tag being broken again this year.

The third stage will really open up when the US legalises at the Federal Level. This is when we expect to see the really big acquisitions, wherein the largest MSO's get completely bought out by one of Big Alcohol, Pharma and/or Tobacco. Yes – we have seen Altria and Constellation already enter the game, but they are just two of an exclusive club that numbers in the 10's.

Someone wise once said that if you don't blow your own trumpet, there will be silence.

So although we don't want to say we told you so, we…

Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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