Consolidation in Cannabis: What’s Happening With Mergers and Acquisitions?

M&As in cannabis are currently in decline. Before we dive into exactly why, let’s take a step back.

Consulting firm Kearney laid out the four steps of the consolidation curve, a phenomenon they discovered after analyzing thousands of M&A deals. The four stages are:

• Opening
• Scale
• Focus
• Balance & Alliance

The cannabis industry is currently in the early stages of the “scale” section of the curve, which should indicate a high rate of M&As. But Viridian Capital Partners reports that between 2021 and 2022, there was a 68% decrease in capital cannabis investments: 3.2 billion in 2022, down from 10.3 billion in 2021. These deals were also smaller than in years past.

So where does the disparity come in?

Firstly, the consolidation curve is not a straightforward linear progression. Things change and adjust based on the state of the market and economy, and the downward turn in M&As reflects many economic concerns.

Several factors affect this. 2020 and 2021 were outlier years for cannabis companies when the COVID pandemic caused record surges in cannabis sales. Since then, interest rates have risen, funding has dried up, there’s been little movement for SAFER banking in the federal government, and people are concerned about a recession in every corner of the country. Several large companies have also had poor performance in profit and prices for cannabis stocks are down, which makes investors wary.

This is highlighted in the failed merger of Cresco Labs and Columbia Care. The two MSO giants announced in March 2022 that they would be merging, but the deal was dead just over a year later. In August 2023, the companies announced they were walking away from the merger.

Since then, the cannabis industry’s M&A activity came to a standstill with mostly smaller deals completed in 2023.

While deals have been slow in the past couple of years, that doesn’t mean there hasn’t been any movement. Here are some of the most notable M&A deals in the cannabis industry, from 2023 to present:

• In February 2023, TPCO Holding Corp announced an all-stock merger with Gold Flora, notable for its location in the California market and because it is a merger that deals entirely in marijuana stocks.
• In June 2023, Canadian company TerrAscend Corp announced two acquisitions in the newly opened Maryland market. Comparatively speaking, these deals were considered “small”, totalling just under $30 million.
• In August 2023, Planet 13 Holdings announced that it would acquire Florida-based VidaCann LLC, cementing Planet 13’s entry into the rapidly expanding Florida Market. The deal was also small in the M&A world, ringing in a hair shy of $50 million.
• In December 2023, MedMen Enterprises Inc. announced that it agreed to sell its cannabis assets in Arizona and Nevada to competitor Mint Cannabis, an Arizona-based multistate operator, for approximately $30 million and will exit those markets.
• In February 2024, Aurora Cannabis Inc., a leading global medical cannabis company, solidified its position as the largest player in the global medical cannabis market by acquiring MedReleaf Australia, a subsidiary of Indica Industries Pty Ltd., for approximately $29 million.

These deals show that there is still interest from large corporations in the cannabis industry, specifically in emerging recreational cannabis markets on the East Coast. This is where the potential for market capitalization is highest in the early stages of a new recreational cannabis market. While none of these deals comes close to the mega-revenue growth deals of 2020 and 2021, they show that M&As in cannabis have not gone to a full stop.

Cannabis is a volatile industry, shifting and changing heavily at the state level. From a regional perspective, some markets are more ripe for growth than others. States on the West Coast are reconciling with heavy price compression and increased competition, while licenses are just opening up in states on the East Coast. The interest in East Coast markets is evident in the deals signed in 2023.

The cannabis market has grown every year for the past decade and shows no signs of slowing down soon. At least four states will grapple with medical or recreational legalization on the ballot in 2024, including medical giant Florida, and more initiatives may come online before then. New legal markets often outperform established markets in cannabis sales, which is promising for profit-driven investors.

There is also renewed hope of movement at the federal level. In September 2023, the Department of Health and Human Services formally recommended that the DEA reschedule cannabis from Schedule I to Schedule III. Last May 2024, the Department of Justice published a notice of proposed rulemaking (NPRM) to this rescheduling with a hearing set for December 2, 2024.  While there are mixed feelings about this recommendation throughout the industry, it is undeniably the biggest movement that has happened at the federal level in decades.

The promise of federal legalization continues to loom over cannabis companies. Is it the pie-in-the-sky tipping point for cannabis companies? Or is it simply too good to be true?

One thing is for sure—the promise of the federal government stepping in to overrule inconsistent regulations at the state level is too big to ignore. Whether or not federal legalization plays out as the industry hopes, it will undoubtedly be a big catalyst to ramp up future M&A deals.

Federal legalization opens up big changes for the industry, including removing the 208E tax, creating better access to capital and banking services, and the potential for smaller companies to be listed on major U.S. exchanges. While there are a handful of cannabis stocks, like Green Thumb Industries, currently traded on the New York Stock Exchange, federal legalization would have a big impact on the revenue growth from cannabis stocks.

Federal legalization will change the face of the industry, but it will also bolster marijuana stocks, the pace of M&A in cannabis and serve as a catalyst for a new influx of capital.

1. Consolidation Among Multistate Operators (MSOs)

Multi-state operators are one of the most significant industry participants in cannabis. These vertically integrated companies operate in multiple states in medical and recreational markets and their names cover marijuana stocks.

Yet even for these corporate giants, profitability and revenue growth are a challenge in cannabis. M&As offer them a way to streamline processes, trim operational fat, and continue to grow without having to reinvent the wheel in every state they move to. Companies like Green Thumb Industries Inc., Verano Holdings, Canopy Growth, Tilray Brands, and Cresco Labs may band together to maximize profits and stock prices and minimize expenses.

2. The Push for Vertical Integration

It’s no surprise that the largest companies in cannabis are those that are vertically integrated. Owning every part of the cannabis supply chain from clones to retail locations is a big financial asset, as companies can stabilize the cost from seed to sale and be less affected by changes in prices at the growing and packaging level. Vertical integration is a capital-intensive process and it’s not right for every business, but M&As can take advantage of owning real estate and consolidating multiple types of cannabis businesses together in a comprehensive pipeline.

3. Eyeing Expansion into New Territories

Newly legal markets often outperform established ones, making them more appealing for investors and acquisitions. This is true for states in the U.S., but may also be true internationally.

American companies are currently the leaders for growth in cannabis, but the green wave is moving across the world. Policy changes in Europe, such as the legalization of recreational cannabis in Germany, are contributing to the expansion of cannabis legalization and its financial impact worldwide. For interested investors and other companies, M&A provides an easier route into new cannabis ventures via established marijuana companies and cannabis products rather than building from the ground up every time.

4. Cross-Industry Collaborations

M&A activity is expanding into adjacent industries in a move to capitalize on the sector’s growth potential. For example, tobacco and alcohol companies are making moves into cannabis as they seek to diversify product offerings and hedge against declining sales in their core markets. These industries bring significant capital and expertise which could drive the growth and maturation of the cannabis market.

5. Technological Innovation

Companies specializing in cannabis technology, such as cultivation automation, data analytics, and compliance software, are becoming attractive business acquisition targets. M&A deals in this space are driven by the need for operational efficiency, compliance with regulations, and improved consumer engagement through digital platforms.

As the cannabis industry continues to mature, the M&A landscape will likely evolve alongside it, shaped by market forces, regulatory shifts, and emerging opportunities. While 2023 saw fewer large-scale deals, there is still significant potential for future consolidation, especially as companies seek efficiency, expansion, and competitive advantage in newly legalized markets.

Every emerging industry goes through growing pains—marked by rapid expansion followed by contraction. While it may not offer immediate comfort to businesses weathering the storm, the cannabis industry will eventually stabilize.

We’ll continue to monitor M&As as a key indicator of the industry’s health. Tracking mergers and acquisitions activities, and IPOs alongside marijuana stocks provides valuable insights into the state of the market. What the rest of 2024 and beyond hold remains to be seen, but one thing is certain: the cannabis industry’s evolution is far from over.

Protecting your cannabis company can seem confusing; however, we’re a full-service insurance brokerage working with carriers worldwide to offer you the best coverage possible. We’re here to help! Please reach out to us today by emailing [email protected] or calling 646-854-1093 for a customized letter of commitment or to learn more about your cannabis insurance options.