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2020 Is Shaping Up To Be The Year Of Cannabis Industry Consolidation

Jan 16, 2020 • 7:43 AM EST
9 MIN READ  •  By Anthony Varrell
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During the last year, we have seen a slowdown in merger and acquisition (M&A) activity in the cannabis sector and this is a trend that our readers need to be aware of. Prior to this slowdown, the velocity of acquisitions was at an all-time high and the valuations associated with these transactions were inflated.

Several high-profile acquisitions that were announced in 2019 have been terminated or are still pending. The closing of these acquisitions will be a positive trend for the sector, and we expect to see a bounce back in the cannabis M&A market in 2020 and beyond. Once valuations start to improve, we expect to see a significant increase in the amount of M&A activity, and this is a trend that we will continue to monitor.

In early 2019, the cannabis sector was trading at an all-time high and this was a catalyst for activity when it came to M&A. Today, we want to highlight 3 companies that can be potential acquirers and 3 companies that could potentially be acquired.

3 Companies that Could Make Additional Acquisitions

With more than $2 billion of cash on the balance sheet, Canopy Growth (WEED.TO) (CGC) is the best positioned to take advantage of strategic M&A opportunities. During the last year, we have seen a slowdown in the number of acquisitions reported by the company. Going forward, we expect this trend to change and to see additional acquisitions reported by the Canadian cannabis producer.

With leverage to more than 20 international cannabis markets, Canopy Growth is focused on several major growth initiatives. We expect to see the company further expand through a series of organic and inorganic growth projects and this could prove to be a major catalyst for the business. Many analysts are closely monitoring Canopy Growth’s leverage to the US market and expect this to prove to be a major long-term growth driver. Once cannabis is legalized at the federal level in the US, Canopy Growth plans to make this a major focus of the business and this is an opportunity that we are excited about.

During the last year, Canopy Growth has been under considerable pressure and recently came off its 52-week lows. The firing of the former-CEO, Bruce Linton put additional pressure on the Canadian cannabis producer and we expect 2020 to be a bounce back year for the business. Going forward, we expect Canopy Growth to make further acquisitions of strategic cannabis businesses and this is an opportunity that we continue to monitor.

MediPharm Labs (LABS.TO) (MEDIF) was one of the first Canadian companies to focus on the cannabis oil opportunity and we are bullish on the growth prospects associated with the operation. In 2020, we expect to see MediPharm enhance its growth prospects through accretive acquisitions that are focused on the vape pen side of the business.

By being highly focused on the cannabis concentrate market, there are a number of ways that MediPharm Labs can create new revenue streams through product innovation or through acquisitions. During the last year, MediPharm has been nothing short of an execution story and has been capitalizing on the cannabis oil markets in Canada and Australia.

Although MediPharm Labs has been executing flawlessly on a multi-faceted growth strategy, the shares have been under pressure with the rest of the cannabis sector. We believe that MediPharm Labs is one of the most attractive ways to play the cannabis 2.0 market in Canada and will monitor how the management team continues to execute.

Jushi Holdings (JUSH.CN) is uniquely positioned to capitalize on the US cannabis market and has leverage to some of the most significant state markets. Currently, Jushi is operating in California, Nevada, New York, Ohio, Pennsylvania, and Virginia. The company is targeting Arizona, Colorado, Georgia, Florida, Illinois, Massachusetts, Maryland, Missouri, New Jersey, Oregon, and Rhode Island. We are favorable on these markets and believe that the business will have a strong position in key US markets. Over the next year, we expect to see Jushi expand into several new markets and will monitor how the management team is able to drive the story forward.

Over the next year, we expect Jushi to record strong growth and for the Pennsylvania market to be a major contributor to this. The company has been laser focused on the Pennsylvania market and we expect the state will become a recreational cannabis market in the near future. Once recreational cannabis is legalized in Pennsylvania, Jushi will have a strong foothold in this market and we are bullish on this aspect of the story.

During the last quarter, the US cannabis retailer has reported several acquisitions in the Pennsylvania market and has been focused on increasing market share. The company has been working tirelessly when it comes to executing on this strategy and we believe that the market underappreciates this aspect of the story.

A few months ago, Jushi sold its 16.5% ownership interest in Gloucester Street Capital for a substantial return on its investment. This asset is levered to the New York market and this is something that investors need to be aware of. New York remains a key market for Jushi which is constructing a state-of-the-art 65,000 sq. ft. hemp processing facility. The company was issued an industrial hemp-CBD processor license from the state of New York and we are bullish on this aspect of the story.

In 2020, we expect to see the US cannabis company to enhance its leverage to the US market by acquiring strategic operators. From a management team standpoint, we are favorable on Jushi and believe that the team is comprised of proven cannabis executives that have a diverse set of expertise. We believe that the management team has had its finger on the pulse of the US market and are bullish in the markets that the business is levered to.

3 Companies that Could be Acquired

Last year, we had the opportunity to visit Stem Holdings (STEM.CN) (STMH) Las Vegas operations and believe that this US focused cannabis company is flying under the radar. When analyzing the assets owned by Stem Holdings, there is a lot to be excited about and we are favorable on the markets that the company is focused on. At current levels, we find the valuation to be attractive and believe that Stem Holdings represents an acquisition target.

During the last year, Stem Holdings has done a fantastic job at expanding its reach and has entered the California and Nevada markets. After an initial launch in Oregon, Stem Holdings proved to be successful in a highly competitive market and has expanded into additional high-growth markets. The company has attractive leverage to burgeoning cannabis markets in the US and abroad and has significant growth prospects as a result of continued execution.

Currently, operations are ramping up in Las Vegas and Stem Holdings has been focused on producing TJ’s Gardens and Yerba Buena, which are the company’s most popular cannabis brands. The Nevada cannabis market represents a massive opportunity and we are favorable on the leverage that Stem Holdings has to this market. On an annual basis, Las Vegas attracts more than 42 million tourists and the cannabis industry has been a major beneficiary of this.

During the last year, Stem Holdings has been under considerable pressure and we believe that this is an opportunity that has been flying under the radar. With leverage to California and Nevada, the company is focused on two of the most exciting cannabis markets in the world and we believe that this makes the business an attractive acquisition target.

Fire & Flower Holdings Corp. (FAF.TO) (FFLWF) has been highly focused on the retail side of the Canadian cannabis industry and we believe that this makes the company an attractive acquisition target. A few weeks ago, the company reported a major milestone and announced that it has started to sell cannabis 2.0 products in its retail stores in Saskatchewan.

By accomplishing this feat, Fire & Flower became one of the first retailers to start selling cannabis 2.0 products in Canada and we are bullish on the growth prospects associated with this vertical. From an acquisition standpoint, we believe that the company could be targeted by Canadian cannabis producers and will monitor how the management team continues to execute on its expansion strategy.

Fire & Flower has the goal of becoming the largest cannabis retailer in Canada and has been laser focused on execution. Over the next year, we expect to see the number of open dispensaries under the Fire & Flower banner to substantially increase and this would make the company even more of a target.

By owning a cannabis retail company, cannabis producers can enhance distribution across Canada, and this makes Fire & Flower a company to be following. During the last year, the company has been under pressure with the rest of the sector and this is an opportunity that we will be following.

When compared to its peers, WeedMD (WMD.V) (WDDMF) is trading at a considerable discount and has been executing on a Canada focused growth strategy. At current levels, we find the valuation to be attractive and would not be surprised if the company was acquired by a Canadian cannabis producer.

From a distribution standpoint, WeedMD has been nothing short of an execution story and has successfully secured multiple distribution channels with agreements with six Canadian provinces. When you combine this amount of distribution with the relationship that WeedMD has with Shoppers Drug Mart, you have a company that is positioned to capitalize on the increasing demand for cannabis products.

One of the most exciting aspects of the Canadian cannabis industry is related to the upcoming change in the types of products that can be sold to recreational consumers. A few months ago, the company formed CX Industries as a wholly owned subsidiary that is laser focused on the cannabis concentrate opportunity. WeedMD is focused on creating high-margin cannabis derivative products and the capital from the financing will play a major role when it comes to executing on this attractive growth vertical.

WeedMD currently has 110,000 sq. ft. of licensed greenhouse production space as well as 26,000 sq. ft. of indoor processing space. The Canadian cannabis producer is fully funded for more than 600,000 sq. ft. of indoor and greenhouse production as well as 27 acres of outdoor cultivation space. Going forward, WeedMD is well positioned to record strong growth and is an opportunity that we are excited about and expect will be acquired.

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Authored By

Anthony Varrell

Anthony Varrell is Managing Director of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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