Cannabis Companies Are Ready for Mergers and Acquisitions

Cannabis Companies Are Ready for Mergers and Acquisitions

After nearly a year when there was almost no deal-making, cannabis companies are now readying themselves for M&A activity. That’s due to realistic stock valuations and the anticipated of continued legalization in the U.S. which attracts buyers to the cannabis industry—a sector that has been destroyed by oversupply and other issues, executives and investors say.

Profitable cannabis companies want to make a beachhead in niche segments and expand their brands by acquisition.

Many are betting that the U.S. presidential election this fall will result in marijuana becoming legal across the United States. Distribution deals could also assist companies in tapping into consumer segments who have shown an increased interest in cannabis products since the beginning of the COVID-19 pandemic.

Biggest Canadian Producers Ready to Buy

Aphria Inc, one of Canada’s largest producers, says that it’s in acquisition mode and is looking for companies that can add a well-known consumer brand to its beverages portfolio or if one that helps the company overcome a lack of chocolate production, CEO Irwin Simon told Reuters.

The company’s net revenue increased 129% from fiscal year 2019. The company’s gross revenue for adult-use cannabis of US $42.5 million in the fourth quarter was an increase of 27% from prior quarter. It was also the fifth consecutive quarter of growth. Net cannabis revenue of nearly US $40 million in the fourth quarter is an increase of 81% from prior year quarter. Also, net revenue of $152.2 million in the fourth quarter reflects an increase of 18% from prior year quarter and increase of 5% from prior quarter. And the company continued to hold its 52.9% gross margin in selling cannabis.

These financial results were reported in late July for the fourth quarter and fiscal year ending May 31, 2020.

Likewise, Canopy Growth Corp, the largest Canadian cannabis producer by market value, had about US $1.5 billion in cash at the end of June. The company’s strong performance will enable it to consider acquisitions, and the current market conditions would provide frequent opportunities, a company spokesman said.

Canopy Growth is backed by Corona beer maker Constellation Brands Inc, which has a significant stake in the company. Its overall ownership of the cannabis company is now 38.6%. Constellation Brands first invested in Canopy in 2017 by purchasing a 9.9% stake for US $191 million with the design of launching a series of cannabis-infused beverages. In 2018, it invested $4 billion in the company.

Another Canadian marijuana company, Cronos Group, has started operations in the U.S. It also is positioning itself to leverage potential sweeping cannabis legalization after the presidential election. However, this company may have issues, as it posted a second quarter report with earnings of -216.67%. Cronos is owned by Zacks Medical Drugs.

Since a high water mark in August 2018 prior to Canada’s national legalization of recreational marijuana, cannabis M&A dropped 80%, and capital raising slumped 70% to $2.71 billion through July 31, according to the Viridian cannabis deal tracker.

But the demand for cannabis has skyrocketed in the pandemic. Industry stock prices have recovered, which many think will result in available funding for deals. All-stock deals are expected to be the norm. However, companies with cash could also spend it on U.S. expansion after the presidential election, Reuters reported.

Canadian Cannabis Companies Pulling for Biden

A Biden victory would immediately mean greenlighting significant expansion for U.S. multi-state operators. Likewise, Canadian producers’ cross-border fortunes also depend on Democratic candidate Joe Biden taking the White House.

However, some analysts think that it may one more quarter before Canadian companies start making deals, while they continue to clean up their balance sheets.

Two companies need to sell in the near-term: MedMen Enterprises Inc and iAnthus Capital Holdings Inc. both restructured to avoid bankruptcy. The two cannabis producers own lucrative licensing agreements and serve markets that present new opportunities for acquiring companies.