Last week, we received a lot of positive feedback on our article that highlighted how the merger and acquisition (M&A) landscape for the cannabis industry has changed since early 2020.
During the last year, we have seen a uptick in the number of M&A transactions in the cannabis industry and this is a trend that we expect to become more significant in the coming years.
One of the most important changes in trends that we have identified is related to the type of companies that are acquiring assets and the type of companies that are merging with other operators.
So far this year, we have seen an increase in the number of companies that we would classify as better capitalized operators which are purchasing operators that represent strategic bolt on acquisitions. Although these transactions tend to be smaller (valued at less than C$100 million), there is a strategic rationale for the purchase.
From acquiring companies that own high-profile cannabis brands to smaller scale operators that have attractive leverage to burgeoning international markets, management teams seem to be highly focused on identifying and purchasing companies or assets that would prove to be immediately accretive to the entire business.
This represents a change of strategy from prior years where Canadian Licensed Producers (LPs) were mainly targeting operators which had grandiose plans as it relates to funded production capacity. For our readers that are newer to the cannabis sector, there was a phase where Canadian LPs were valued on funded capacity, which is a valuation metric that we considered to be downright laughable.
This metric would assume that all of the cash that a company had on hand would be used to expand production capacity. The reason we found this metric to be laughable is because it assumed that operators would not make any mistakes in the constructing, licensing, or cultivating process.
This method of valuing companies was quickly dismissed after leading Canadian LPs like Canopy Growth Corporation (TSX: WEED) (Nasdaq: CGC) and Aurora Cannabis Inc. (TSX: ACB) (Nasdaq: ACB) made several mistakes in a variety of processes (i.e. licensing, construction, and expected timelines).
During the last two years, there has been a change in management team at several high-profile cannabis operators (in the US and Canada) and we are favorable on the type of human capital that is entering the sector. We believe the legal cannabis industry is reaching an inflection point and are excited about how the industry has advanced from an M&A, a financing, and a valuation standpoint.
Later this week, we will be publishing an article that provides more specifics on how the M&A landscape has changed by highlighting certain transactions and believe our readers should be aware of this.
If you are interested in learning more about the consolidation trend in the cannabis industry, please send an email to firstname.lastname@example.org with the subject “Cannabis Consolidation” to be added to our distribution list.
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