Cannabis M&A activity on fire: but is this what was expected? Experts say, look at Q1 earnings

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Consolidation in the cannabis industry is inevitable as the market matures.

As 2022 approached, many forecasts predicted a new wave of M&A activity after a buoyant 2021. With nearly three months of the year completed, opinions are mixed on M&A activity so far.

Mergers and acquisitions in 2022 are on fire

In one camp, sources say mergers and acquisitions are on track, with forecasts calling for another year of consolidation.

Matt Hawkins, Managing Partner at Entourage Effect Capitalsaid large M&A deals are popping up at the single state and national level.

Hawkins cited various examples, including Cresco Labs Inc. CRLBF recently announced its intention to acquire British Care Inc CCHWF for $2.1 billion. He also noted Harborside Inc HBORF business to buy Urban leaf and loud pack form StateHouse Holdings.

“M&A is clearly driving industry growth for the foreseeable future,” Hawkins said.

Julie Herzogpartner of Fortis Law Partnersagreed “in the sense that we continue to see major players ensuring they remain number one through mergers and acquisitions.”

She said smaller companies try to stand out as attractive acquisitions by becoming regional or product category leaders.

Going back to October 2021, Herzog cites Canopy Growth Corp’s GCC $300 million purchase of Wana Brands, pending legalization of THC in the United States, as an example of things to come.

“I expect to continue to see many similarly structured transactions and encourage my clients to start preparing their businesses for potential mergers and acquisitions now before federal legalization occurs,” Herzog said.

David Farisvice president of sales and marketing for Planet 13 Holdings Inc PLNHFsees specific states becoming attractive targets for mergers and acquisitions.

“I definitely see emerging markets like Florida as a major opportunity for the growth of the cannabis industry,” Farris said.

Planet 13 has announced plans to enter the state with a $55 million investment Harvest Health and recreation purchase of a subsidiary in September 2021. In March 2022, the company announced that the Jacksonville suburb of Orange Park would be its first dispensary in Florida.

Mergers and acquisitions are slower than some expected

The latest news from Cresco further suggests larger-scale deals are happening in 2022. Still, multiple sources believe M&A activity in the year was slower than expected.

Morgan Paxhaco-founder and managing director of Poseidon Asset Management said the subdued market activity is not a surprise due to macro-level risks and a busy 2021. His company predicts that 2022 will see smaller transactions funded by cash, seller’s notes and a minor equity issuance.

However, a greater or higher frequency of transactions is not excluded.

“We believe larger events will pick up as risk appetite returns as this will have more impact on acquirer fundamentals,” Paxhia said.

Andrew J. Kaye, CFO of Sweet Leaf Madison Capital said opportunities and currencies were scarce in the short term. He cited a kind of “hangover” from M&A.

“Croptober’s hangover, COVID dislocation, and legacy market competition due to high taxes have all contributed to stagnant sales,” he said.

Down at the moment, Kaye doesn’t see the current drop in sales having a lasting impact on M&A deals.

Georges MancherilCEO and Founder of Tailor-made financial cited macroeconomic concerns and geopolitical turmoil as key factors for a slow 2022.

“That obviously had an effect on our industry and led to fewer M&A deals than originally anticipated,” said Mancheril.

Still, he notes that the Cresco-Columbia Care agreement indicates that significant activity will still occur.

First quarter reports will play a vital role

Many market players are gearing up for mergers and acquisitions to ramp up in the later stages of 2022. In the meantime, John Kagiadirector of knowledge for New border data said eyes and ears remain glued to first-quarter 2022 sales revenue reports.

He reported that seasonal cannabis trends have shown a drop in sales between October and February for the past few years. Kagia added that high inflation rates, supply chain disruptions and rising consumer prices may have played a possible role in market activity.

“We know that cannabis is very recession-proof, but in the face of tighter finances, consumer efforts to cut costs could negatively impact legal operators’ revenues in the coming months,” Kagia said.

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