Mergers and acquisitions brighten the cannabis industry

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Last week, Cresco Labs announced what would be the largest acquisition of a public company operating in the US cannabis industry, by agreeing to buy CannaRoyalty (dba Origin House) in a 100% equity transaction. valued at $ 825 million. Cresco Labs is a multi-state operator based in Chicago. This acquisition will position them strongly in California, where Origin House operates as a distributor, manufacturer, grower and brand. Investors subscribed to the deal, raising Cresco Labs' stock, which began trading in December, to an unprecedented level since it closed up 10% over the week.

The acquisition of Cresco Labs followed another big step four weeks ago, as an Arizona-based company, Harvest Health & amp; Recreation has announced the current $ 850 million acquisition of private company Verano Holdings, a Chicago-based MSO. As with the reaction to the Cresco deal, Harvest stocks have skyrocketed after the announcement. The US cannabis sector is not the only one to see consolidation: HEXO Corp. recently announced the pending acquisition of Newstrike Brands. In this case too, investors appreciated the deal and propelled HEXO to an unprecedented new high.

M & A is not new to the cannabis industry, we have seen a substantial consolidation so far in Canada. The first merger between licensed licensed producers was the acquisition of Bedrocan Cannabis by Canopy Growth in late 2015, when the company was known as Tweed Marijuana. Canopy Growth followed this acquisition in early 2017 by acquiring Mettrum and adding Hiku Brands in 2018. Aurora Cannabis closed the acquisitions of CanniMed Therapeutics and MedReleaf last year, two very large transactions, both of which are among the main terms of income generation in Canada. More recently, Aleafia Health has concluded the acquisition of Emblem. Tilray did not buy the entire company, but recently announced the acquisition of Manitoba Harvest, a leading hemp food company owned by Compbad Diversified, a publicly traded company. This was after the purchase & nbsp; a private limited partnership in Ontario.

In the United States, a number of MSOs have been aggressive on the M & A front, buying private operators. Cresco Labs, for example, announced last month the acquisition of the private group VidaCann & nbsp; to place it on the Florida market. Green Thumb Industries is acquiring Essence, which is heavily implanted in Nevada and also California, agreeing to pay $ 290 million, mostly in stock. Earlier this year, iAnthus Capital closed the acquisition of all US badets of MPX Bioceutical. The agreement significantly expanded iAnthus's footprint and gave it strong product and retail brands, as well as substantial revenues.

Expect more M & A

The cannabis market is ripe for significant consolidation, and the recovery we've seen recently is probably just the beginning. In Canada, the number of licensed companies exceeds 140 (there are now 168 licenses, but several companies hold multiple licenses). There are more than 50 publicly traded companies (most listed in Canada or double listed, but some are listed only in the US), which is probably too much. If many of these companies will probably disappear over time, because they can not compete and justify their valuations, we will likely see continued consolidation. Just as HEXO Corp and Aleafia Health have been able to find acquisitions that do not require a substantial premium, I think more and more players in the industry are choosing to marry rather than trying to compete on their own in an overcrowded market. We have also seen two very important strategic investments in space: Constellation Brands acquires effective control of Canopy Growth and Altria the acquisition of effective control of the Cronos group, and we may see more. I continue to expect a pharmaceutical company to buy a limited partnership in Canada.

In the United States, there are two areas for M & A. First, we should expect to see more transactions from the major MSOs. The reasons they group together are to increase the scale of their operations and reduce their cost of capital. In addition, their increased presence helps them to expand and leverage their brand. Another area of ​​consolidation is probably the CBD of the industrial hemp zone. We have already seen TerrAscend, a Canadian CD, enter into a small agreement to enter the US hemp industry (it also operates as an MSO in state-regulated cannabis markets). Level Brands has recently acquired & nbsp; cbdMD.

How to play the M & A theme

I've had a lot of luck with M & A involving publicly traded companies in the cannabis business because I held positions in one or more of my model portfolios at 420 Investor in the almost all companies acquired at the time of the announcements. Although my intention is not to hold shares solely for the reason that I expect them to be acquired, it is certainly something that I keep in mind . I also regularly share with my subscribers my expectations for potential consolidation.

Before sharing some general ideas, I want to share a very simple way to take advantage of M & A trends. When an agreement is announced, the target company will typically trade at a price significantly below the implied transaction price. The area is far from effective and it is an area where it is quite obvious sometimes. In addition to the lack of larger investors focused on the arbitrage of these situations, borrowing costs related to the short sale of the shares of the acquiring company may constitute an opportunity for small investors. For example, Cresco Labs has agreed to issue .8428 shares of its own shares for each Origin House share, and this transaction is likely to be completed. If we take the closing price of Cresco Labs Friday at C $ 16.55, then Origin House, at the completion of the transaction, would trade at C $ 13.95, but closed at C $ 12.57. For all those who want to invest in Cresco Labs and expect the deal to be settled, paying $ 12.57 CAD for Origin House is ultimately a cheaper way to do it because it represents a 10% discount. Again, this market only works if the contract is concluded and, of course, there is no guarantee that the price of Cresco Labs will not fall. Therefore, there is no free lunch unless Cresco Labs is sold to buy Origin House (and the contract is closed). on the proposed terms).

In Canada, I still believe that there will be a consolidation between & nbsp; medium and small businesses. I would focus on those who generate income and develop their operations, like those of Canadian Cannabis Level 1 and Level 2 index. Companies with unique badets or business models are likely to be more attractive to potential buyers. Different geographies or modes of production are often cited by buying companies. An idea that I shared with my subscribers is that I expect that one or more US operators will buy a smaller drive to give them access to global markets. & Nbsp; As I mentioned above, I expect a pharmaceutical company to buy a Canadian price. LP, and there are also other types of possible extra-industrial buyers, such as alcohol and tobacco companies, as we have already seen, as well as CPG companies in general. I do not expect Aurora Cannabis or Canopy Growth to make any other cultural acquisitions in Canada.

In the cannabis sector for medical purposes and for adult use, regulated by the State, many of the MSOs still have gaps. California is an area that could be of some interest. This market is mbadive but, in the absence of regulation 15 months ago, companies have struggled to make acquisitions with confidence. Several publicly traded companies are focused on the state and the deal with Cresco to buy Origin House should serve as an alarm signal to investors for them to focus on them (as well as for private companies, of course). So far, the response has been rather subdued for publicly traded equities focused on the California market. Beyond California, there are smaller operators, one or more states, who could also fill the voids of large companies. In addition, companies with portfolios of branded products may be interested in MSOs. Finally, although many Canadian-registered record companies are not able to invest in the US-regulated cannabis industry (otherwise they risk losing their listings on the TSX, TSXV, US NASDAQ or the NYSE), there are several that are likely to do so. so. In addition, I would not be surprised to see a company listed on the TSX or TSXV relocate to CSE to enter the United States, which is, after all, a much larger opportunity than Canada's .

One last area to explore is the CBD's Industrial Hemp Space. I'm keeping a close eye on Charlotte's web, CV Sciences and Elixinol, but there are a few others too. In my opinion, these companies, which are already generating substantial revenues, could be considered as candidates for acquisition by traditional companies seeking to penetrate into space as the regulatory environment is clarified. Already, perceptions have changed dramatically as CVS and Walgreen are now selling topical CBD products, some of which are provided by publicly traded companies. Beyond traditional companies, Canadian management companies and US MSOs could make acquisitions in this space. Canopy Growth, Tilray, Village Farms and TerrAscend are already present in the CBD market in the United States, or at least in this direction, while many MSOs are also involved, including 1933 Industries, Cresco Labs, Curaleaf, Green Growth Brands, iAnthus and Liberty Health.

The bottom line & nbsp;

Consolidation is growing in the cannabis sector and investors are rewarding companies that buy by increasing their inventory after the announcement of contracts. This will likely encourage other companies to be more aggressive in their M & A strategies. Investors can take advantage of this, including identifying in advance probable acquisition targets or investing in their prices. updated after the announcement of the transaction to take advantage of an arbitrage opportunity.

Disclaimer: I mentioned Aurora Cannabis, Canopy Growth, Charlotte's Web, Cresco Labs, Green Growth Brands, iAnthus Capital, Liberty Health, and TerrAscend, which are customers of New Cannabis Ventures, where we provide charts on board the investor on their behalf. We disclose all clients of public companies& nbsp;right here. I do not own any of the shares mentioned in this article, although I can include them in one or more model portfolios at 420 Investor.

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Last week, Cresco Labs announced what would be the largest acquisition of a public company operating in the US cannabis industry, by agreeing to buy CannaRoyalty (dba Origin House) as part of a fully stock transaction valued at $ 825 million. Cresco Labs is a multi-state operator based in Chicago. This acquisition will position them strongly in California, where Origin House operates as a distributor, manufacturer, grower and brand. Investors subscribed to the deal, raising Cresco Labs' stock, which began trading in December, to an unprecedented level since it closed up 10% over the week.

The acquisition of Cresco Labs followed another major decision four weeks ago, while Harvest Health & Recreation in Arizona announced the current $ 850 million acquisition of Verano Holdings, a privately held Chicago. As with the reaction to the Cresco deal, Harvest stocks have skyrocketed after the announcement. The US cannabis sector is not the only one to see consolidation: HEXO Corp. recently announced the pending acquisition of Newstrike Brands. In this case too, investors appreciated the deal and propelled HEXO to an unprecedented new high.

Mergers and acquisitions are not new to the cannabis industry, as we have seen substantial consolidation to date in Canada. The first merger between licensed licensed producers was the acquisition of Bedrocan Cannabis by Canopy Growth in late 2015, when the company was known as Tweed Marijuana. Canopy Growth followed this acquisition in early 2017 by acquiring Mettrum and adding Hiku Brands in 2018. Aurora Cannabis closed the acquisitions of CanniMed Therapeutics and MedReleaf last year, two very large transactions, both of which are among the main terms of income generation in Canada. More recently, Aleafia Health has concluded the acquisition of Emblem. Tilray did not buy the entire company, but recently announced the acquisition of Manitoba Harvest, a leading hemp food company owned by Compbad Diversified, a publicly traded company. This acquisition followed the purchase of a private holding company in Ontario.

In the United States, a number of MSOs have been very aggressive in mergers and acquisitions, buying private operators. Cresco Labs, for example, announced the acquisition of VidaCann, a private company, last month to introduce it to the Florida market. Green Thumb Industries is acquiring Essence, which is heavily implanted in Nevada and also California, agreeing to pay $ 290 million, mostly in stock. Earlier this year, iAnthus Capital closed the acquisition of all US badets of MPX Bioceutical. The agreement significantly expanded iAnthus' footprint and gave it strong product and retail brands, as well as substantial revenues.

Expect more M & A

The cannabis market is ripe for significant consolidation, and the recovery we've seen recently is probably just the beginning. In Canada, the number of licensed companies exceeds 140 (there are now 168 licenses, but several companies hold multiple licenses). There are more than 50 publicly traded companies (most listed in Canada or double listed, but some are listed only in the US), which is probably too much. If many of these companies will probably disappear over time, because they can not compete and justify their valuations, we will likely see continued consolidation. Just as HEXO Corp and Aleafia Health have been able to find acquisitions that do not require a substantial premium, I think more and more players in the industry are choosing to marry rather than trying to compete on their own in an overcrowded market. We have also seen two very important strategic investments in space, Constellation Brands gaining effective control of Canopy Growth and Altria, the effective control of the Cronos group, and we may see more. I continue to expect a pharmaceutical company to buy a limited partnership in Canada.

In the United States, there are two areas of mergers and acquisitions. First, we should expect to see more transactions from the major MSOs. The reasons they group together are to increase the scale of their operations and reduce their cost of capital. In addition, their increased presence helps them to expand and leverage their brand. Another area of ​​consolidation is probably the CBD of the industrial hemp zone. We have already seen TerrAscend, a Canadian CD, enter into a small agreement to enter the US hemp industry (it also operates as an MSO in state-regulated cannabis markets). Level Brands has recently acquired cbdMD.

How to play the M & A theme

I was very lucky when it involved mergers and acquisitions involving publicly traded companies in the cannabis industry because I held positions in one or more of my Model portfolios at 420 Investor in almost all companies acquired at the time the listings. Although my intention is not to hold shares solely for the reason that I expect them to be acquired, it is certainly something that I keep in mind . I also regularly share with my subscribers my expectations for potential consolidation.

Before sharing some general ideas, I want to share a very simple way to take advantage of mergers and acquisitions trends. When an agreement is announced, the target company will typically trade at a price significantly below the implied transaction price. The area is far from effective and it is an area where it is quite obvious sometimes. In addition to the lack of larger investors focused on the arbitrage of these situations, borrowing costs related to the short sale of the shares of the acquiring company may constitute an opportunity for small investors. For example, Cresco Labs has agreed to issue .8428 shares of its own shares for each Origin House share, and this transaction is likely to be completed. If we take the closing price of Cresco Labs Friday at C $ 16.55, then Origin House, at the completion of the transaction, would trade at C $ 13.95, but closed at C $ 12.57. For all those who want to invest in Cresco Labs and expect the deal to be settled, paying $ 12.57 CAD for Origin House is ultimately a cheaper way to do it because it represents a 10% discount. Again, this market only works if the contract is concluded and, of course, there is no guarantee that the price of Cresco Labs will not fall. Therefore, there is no free lunch unless Cresco Labs is sold to buy Origin House (and the contract is closed). on the proposed terms).

In Canada, I continue to believe that there will be a consolidation of small and medium-sized businesses. I will focus on those who generate income and develop their operations, such as the Canadian Cannabis 1 and 2 indexes. Companies with unique badets or business models are likely to be more attractive to potential buyers. Different geographies or modes of production are often cited by buying companies. An idea that I shared with my subscribers is that I expect that one or more US operators will buy a smaller drive to give them access to global markets. As I mentioned above, I expect that a pharmaceutical company will buy a Canadian record company, and there are other types of non-domestic buyers. possible industrialists, including the alcohol and tobacco companies, as we have already seen, as well as the GPC companies. in general. I do not expect Aurora Cannabis or Canopy Growth to make any other cultural acquisitions in Canada.

In the cannabis sector for medical purposes and for adult use, regulated by the State, many of the MSOs still have gaps. California is an area that could be of some interest. This market is mbadive but, in the absence of regulation 15 months ago, companies have struggled to make acquisitions with confidence. Several publicly traded companies are focused on the state and the deal with Cresco to buy Origin House should serve as an alarm signal to investors for them to focus on them (as well as for private companies, of course). So far, the response has been rather subdued for publicly traded equities focused on the California market. Beyond California, there are smaller operators, one or more states, who could also fill the voids of large companies. In addition, companies with portfolios of branded products may be interested in MSOs. Finally, although many Canadian-registered record companies are not able to invest in the US-regulated cannabis industry (otherwise they risk losing their listings on the TSX, TSXV, US NASDAQ or the NYSE), there are several that are likely to do so. so. In addition, I would not be surprised to see a company listed on the TSX or TSXV relocate to CSE to enter the United States, which is, after all, a much larger opportunity than Canada's .

One last area to explore is the CBD's Industrial Hemp Space. I'm keeping a close eye on Charlotte's web, CV Sciences and Elixinol, but there are a few others too. In my opinion, these companies, which already generate substantial revenues, could be considered as candidates for acquisition by traditional companies seeking to enter space as the regulatory environment is clarified. Already, perceptions have changed dramatically as CVS and Walgreen are now selling topical CBD products, some of which are provided by publicly traded companies. Beyond traditional companies, Canadian management companies and US MSOs could make acquisitions in this space. Canopy Growth, Tilray, Village Farms and TerrAscend are already present in the CBD market in the United States, or at least in this direction, while many MSOs are also involved, including 1933 Industries, Cresco Labs, Curaleaf, Green Growth Brands, iAnthus and Liberty Health.

The final result

Consolidation is growing in the cannabis sector and investors are rewarding companies that buy by increasing their inventory after the announcement of contracts. This will likely encourage other companies to be more aggressive in their mergers and acquisitions strategies. Investors can take advantage of this, including identifying in advance probable acquisition targets or investing in their discounted prices after the announcement of the transaction to take advantage of an opportunity to invest. # 39; arbitration.

Disclaimer: I mentioned Aurora Cannabis, Canopy Growth, Charlotte's Web, Cresco Labs, Green Growth Brands, iAnthus Capital, Liberty Health, and TerrAscend, who are my clients at New Cannabis Ventures, where we supply charts for investors. We disclose all clients of public companies right here. I do not own any of the shares mentioned in this article, although I can include them in one or more model portfolios at 420 Investor.