The legal marijuana industry in the United States is young, very young. Couple that with the reality of a still missing federal legality piece and it’s pretty easy to see how the scramble for market share has at times, perhaps until now, been somewhat chaotic.
It’s what maybe makes the recent announcement by Florida-based giant Trulieve that it is to acquire Harvest Health & Recreation particularly notable.
Sure, the price tag of the proposed all stock deal is steep – the $2.1 billion headline figure is the largest to date in the U.S. marijuana industry and has led to a rising tide of speculation that more merger and acquisition activity is likely to soon follow – but perhaps the announcement could also be met with at least a metaphorical shrug of the shoulders as simply part of an inevitable and long expected step in the evolution of an immature industry.
The deal is arguably most significant, therefore, not in itself, but as part of a much bigger picture of what tends to happen in young industries.
It was almost like a megadeal was expected on a daily basis.
“The fragmented cannabis industry was already consolidating, and will continue to consolidate for scale and capital availability,” Mike Regan — investment specialist and founder of Denver-based MJResearchCo, a company focused on cannabis investment analysis — said. “This deal is transformative for both Trulieve and Harvest, as Trulieve significantly expands beyond Florida and Harvest improves its balance sheet, but the rest of the industry will just see a larger Trulieve running the Harvest assets.”
In other words, once the shock of the proposed transaction’s sticker price wears off and the excitement dies down, such a move really shouldn’t surprise anyone. It is perhaps more a sign that the industry is finally entering a new phase of maturity — one that was very much anticipated but which may have faced structural delays. Notably, Trulieve announced the end of the mandatory 30-day waiting period late June for initial antitrust concerns to be raised, significantly raising the probability of closing this transaction.
Lots of Froth in the Early Stages
As the battle for market share in potentially lucrative markets first unfolded in the U.S. marijuana world, there was a string of M&A announcements, each one apparently seeming to outdo the other. It was almost like a megadeal was expected on a daily basis.
For example, there was troubled Californian group MedMen Enterprises first saying in October 2018 they would buy Illinois-based privately held PharmaCann for $682 million, only for the deal to be scuppered a year later.
Harvest itself, and then privately held multistate operator (MSO) Verano Holdings, which has now gone public, also agreed to a tie-up in what was at the time a deal valued at $850 million in March 2019.
Guess what? The deal also fell through amid antitrust concerns and investor fears that expanding companies didn’t ultimately have the financial and organizational wherewithal to effect such ground breaking transactions. Stock prices had slumped from heady highs, significantly reducing the value of announced transactions, and then came the coronavirus pandemic just to add to the decline in optimism.
Back to Basics, Like Profitability
Like anything else, it is the soundly performing companies that can execute on their expansion plans and, shockingly, maybe even eventually turn a profit, investors will in the end turn to.
Trulieve, itself, is one of the better performing companies in terms of profitability, reporting net income of $63 million in 2020 for example. Harvest, by contrast, reported a net loss of $23.1 million for the first three months of 2021, not apparently overly worrying Trulieve CEO, Kim Rivers, as she vowed to make the combined entity “the most profitable cannabis company in the world in the most important market in the world,” according to an interview with Yahoo Finance at the time of the deal announcement.
Where the deal could be truly significant in the development of a less fragmented industry is if it is eventually approved with few changes to the planned tie-up as it is now. The change to a Biden presidential administration, for example, is seen as more favorable with less of an emphasis on antitrust worries being raised by what was a more hostile federal government and justice department environment under the previous administration.
If the deal does go through, expected either in the third or fourth quarter of 2021, especially if there are few assets that have to be traded, consolidation, including even perhaps similarly sized megadeals, could be a more common occurrence, observers note.
“If this deal closes and there’s no regulatory holdback, then I think this will accelerate the larger deals that really did cool off,” Morgan Paxhia –managing director of San Francisco investment group Poseidon Asset Management told Marijuana Business Daily at the time of the deal announcement — said. “I think this does open the door.”
His partner at Poseidon, Emily Paxhia, also said at the time that the Trulieve Harvest transaction reflects an industry focused on increasing prudence.
Increased strategic allocation of capital, stronger balance sheets, efforts to reduce capital costs and a greater focus on shareholder value are all good signs of a developing phase in the industry.
“All are steps moving toward a lasting industry,” she told Marijuana Business Daily. “That’s really the long view of how you build a cannabis company.”
Cream Rising to the Top?
It remains to be seen of course what such consolidation will truly look like in the future but the industry can safely bet well funded and prudent operators with a long-term view will be the companies deciding that.
On the very same day Trulieve announced the acquisition, for example, major multistate operator (MSO) Curaleaf released its quarterly results with chairman, Boris Jordan, noting it was clearly looking for further acquisition opportunities after building up some key capital reserves.
“We raised approximately $300 million in new capital during the first quarter to help support our ability to scale for new adult-use markets while also allowing us to be opportunistic for highly attractive assets that further strengthen our position as the global cannabis market leader,” Jordan said in a statement.
Cresco Labs, the Chicago-based MSO, has also been busy in the first few months of the year with acquisitions of Florida-based vertically integrated Bluma Wellness and an agreement to buy Cultivate Licensing and BL Real Estate, a Massachusetts-based vertically integrated operator.
Another major MSO, Green Thumb Industries, announced the acquisition of Dharma Pharmaceuticals May 3, a Virginia-based operator and retailer, securing further expansion eastwards for the Chicago-based group. Like Trulieve, GTI has reported consistent net income growth with three straight quarters of profit.
There are many tiers in what is still a highly fragmented U.S. marijuana industry but it has long been discussed by analysts and observers that the cream will eventually rise to the top in the bigger MSOs with just a handful of well run and well funded operators expected to dominate market share eventually. Trulieve has perhaps taken the first major step on that road.