A wave of consolidations is highly expected in the coming years, with some of the bigger players acquiring specialized startups.
The cannabis industry has been one of the biggest standout markets in the last few years. It has witnessed massive developments, including a rapid rise in the number of states that have legalized the use of at least one of its products in the U.S. Nearly all of the 50 states have legalized the use of cannabis in its medicinal or CBD oils varieties while more than a dozen now allow growing or the recreational use of marijuana.
Many startups have been inspired by this change and are now exploring alternative ways to invest in the industry. As such, there are now several small players in a market that is rapidly expanding, which means that it is only a matter of time before bigger players begin to show interest. Therefore, a wave of consolidations is highly expected in the coming years with some of the bigger players acquiring specialized startups while some smaller players form mergers to try to withstand the threat of the giants that join the market.
Mergers and Acquisitions deals are coming in hot and fast
Canada-based Aurora Cannabis (ACB[NYE] – $7.77 ) has already set the tone for things to come in the next few years with its acquisition of MedReleaf (another Canadian cannabis producer) for CA$3.2 billion — $2.3 billion in USD. This is the biggest cannabis acquisition to date, which makes Aurora Cannabis a mammoth of a company in the industry. According to reports, the newly created company is now “capable of producing 570,000 kilograms of high-quality cannabis per year at a cost of less than $1 per kilogram.”
In another deal, Las Vegas’ largest marijuana dispensary and cultivation operation, Essence Cannabis announced in November last year that it was selling the business for $290 million to Chicago-based Green Thumb Industries. Essence, whose parent company is Integral Associates will provide Green Thumb Industries with an extended footprint in Nevada’s burgeoning cannabis market.
In general, last year, was one of the busiest for the cannabis industry with M&A activity more than doubling from the previous year while startups raised more than $4 billion. And in 2019, companies are expected to continue on this trend with more startups seeking capital to finance growth while others are acquired by their giant counterparts.
This wave of M&As seems to be what is likely to prepare the cannabis industry for the next growth phase. Just a few years ago, cannabis could have easily landed you in jail or in some legal battles in the United States. And while there is no federal legalization yet, things have improved dramatically with nearly all US states now having some form of legalized cannabis.
North of the border, Canada is setting all the standards following the federal legalization of cannabis. American cannabis companies will be looking to pounce on the opportunity created up North as they wait to see if federal legalization in the US will come. One major benefit of federal legalization is that it opens up cannabis businesses to the world of stock markets, which gives them more access to capital.
What sections of the market are companies looking to invest in?
The biggest attraction currently is medical cannabis. This section of the cannabis industry is attracting all the big players including UK-based pharma company GW Pharmaceuticals (GWPH[NSD] – $139.11 ), whose cannabinoid drug Epidiolex received FDA approval in June 2018 for controlling seizures in people with difficult-to-treat childhood-onset epilepsy. More pharma companies will be eager to ride on the success of Epidiolex by launching their own cannabinoid drugs.
One drawback to this section of the industry is that companies are required to spend a lot in research and development, and must go through several clinical trials before they can finally receive approval from relevant authorities. This requires a significant investment, and it explains why some players in the space are seeking to merge or be acquired by a company with a strong financial position.
Recreational marijuana: while medical cannabis may have caught the eyes of the big players, recreational marijuana seems to be resonating well with small and medium-sized businesses.
Cannabis dispensaries are now being launched left, right and center to provide both medicinal and recreational marijuana products. A good example, in this case, is Essence Cannabis, which provides cannabinoid health products for both medical and recreational use by patients.
Industrial hemp: This is yet another segment of the cannabis industry that is expected to witness tremendous growth in the next few years. Industry research reports estimate that the global industrial hemp market will grow at a CAGR of 14% to a value of $10.6 billion in 2025.
In order to capitalize on this expansive growth, major players are integrating vertically by acquiring hemp plant firms and forming partnerships with industrial manufacturers, which include among others, the textile industry. They have also created a network of both physical and online stores to market and distribute their products.
Hemp cosmetics: In some cases, this is classified under industrial hemp, but unlike in markets like the textile industry, where hemp fiber is the key ingredient, the CBD oil is the main extract that companies are using in cosmetics.
Companies operating in the personal care industry are using hemp seed oil and other extracts on personal care products, which include soap, shampoo, body lotions, and hair care products. And while the hemp oil is mostly used in conjunction with other mainstream chemicals, there is a developing trend of pure hemp oil cosmetics.
Cannabis-fused beverages: This is fast becoming another big winner in the cannabis industry. Startups have launched cannabis fused drinks (both soft and alcoholic) in what is seen as an attempt to disrupt the static beverages market. Even the might of the soft drinks market, The Coca-Cola Co (KO[NYE] – $49.42 ) has started to show interest.
In September last year, Coca-Cola said that it was monitoring the “nascent industry and is interested in drinks infused with CBD — the non-psychoactive ingredient in marijuana that treats pain but doesn’t get you high.” This got major cannabis stocks rallying led by Aurora Cannabis. Others are looking to introduce what is being called a cannabis beer to rival the mainstream beer market. So, it is really becoming interesting as companies prepare for the next growth phase of the industry.
In summary, legalization of cannabis in most parts of North America has triggered an insatiable demand for cannabis investments. The few points discussed here are among the most attractive at the moment with medicinal and recreational marijuana, in particular, topping the list. Federal legalization will not only create an opportunity for the companies to raise capital via IPOs and other placements but will also create massive awareness and media coverage which will boost global growth.
The rush to remain on top is what is driving small players to merge with each other as the giants cherry-pick their preferred acquisitions that will help them pounce on the cannabis industry growth. At this point, it looks like a consolidation of the cannabis industry is a necessary step as the market prepares to move to the next level.