Cannabis industry readies for M&A after COVID-19 boosts weed demand

Medmen Enterprises

11/08/2020 18:58

By Shariq Khan
    Aug 11 (Reuters) - After nearly a year of next-to-no
deal-making, cannabis companies are gearing up for mergers and
acquisitions as realistic stock valuations and the prospect of
U.S. legalization attract buyers to a sector that has been
decimated by oversupply and other issues, executives and
investors say.
    Profitable cannabis companies want to buy their way into
niche segments and expand their brands, betting that the
November U.S. presidential election will lead to weed becoming
legal across the United States. Distribution deals could also
help companies reach consumers who have shown an increased
appetite for pot products since the onset of the coronavirus
pandemic.
    Aphria Inc  APHA.TO , one of Canada's largest producers, is
open to making purchases if it adds a well-known consumer brand
to its beverages portfolio or if it helps the company overcome a
lack of chocolate production, CEO Irwin Simon told Reuters.
    Canopy Growth Corp  WEED.TO , the largest Canadian pot
producer by market value, had about C$2 billion in cash at the
end of June. The strong balance sheet allows it to pursue
acquisitions and the current market conditions would provide
frequent opportunities, a company spokesman said. Canopy is
backed by Corona beer maker Constellation Brands Inc  STZ.N .
        
    ROCKY START
    Since its peak in August 2018 in the run-up to Canada's
legalization of recreational weed, cannabis stocks tracker MJ
ETF  MJ.N  has dropped 70%. M&A fell 80% and capital raising
slumped 70% to $2.71 billion through July 31, according to the
Viridian cannabis deal tracker.
    

    However, as pot demand surged in lockdowns, stock prices
have recovered, raising prospects that funding will be available
for some deals.
    "You'll still see a lot of the same funding sources but
they're going to be much more diligent and cautious with their
dollar," said Avis Bulbulyan, CEO at cannabis consultancy Siva
Enterprises.
    All-stock deals are expected to be the trend, but companies
with cash could also spend it on U.S. expansion after the
election, Katie Ashton and Eric Berlin of the Chicago office of
the Dentons law firm told Reuters in an email.
    
    ALL EYES ON ELECTIONS
    Scott Paterson, chairman of media company Miraculo Inc, says
a Democratic victory would instantly set in motion significant
expansion for U.S. multi-state operators. Canadian producers'
cross-border ambitions also hinge on U.S. legalization, which
Democratic candidate Joe Biden's base is seen advocating.
    However, it could be another quarter before Canadian
companies start making deals as they are still cleaning up their
balance sheets, said Stuart Titus, CEO of Medical Marijuana Inc
 MJNA.PK .  urn:newsml:reuters.com:*:nL1N2DU15D
    Among those most pressed to sell, MedMen Enterprises Inc
 MMEN.CD  and iAnthus Capital Holdings Inc  IAN.CD , both
restructuring to avoid bankruptcy, have valuable licenses and
serve markets that can be new opportunities for buyers, Titus
said. 
    MedMen and iAnthus did not respond to requests for comment.
    New players that have been on the sidelines could also step 
in.
    "When it becomes fully legal, expect 'Big Food' and 'Big
Agra' to jump in, to a much greater extent than they have so
far... they could try and develop their own name brands," said
William Gay, a lawyer at Wilson Elser Moskowitz Edelman & Dicker
LLP.

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 (Reporting by Shariq Khan in Bengaluru; Editing by Dan Grebler)
 ((Shariq.Khan@thomsonreuters.com; Within U.S.+1 646 223 8780,
outside U.S. +91 80 6182 2681; Twitter: @shariqrtrs;))