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Although the last few years have been volatile for the global cannabis industry, we believe the sector comprises some of the fastest-growing businesses. When it comes to the global cannabis market (excluding Canada), we are of the opinion that most countries are barely in the first inning of a multi-decade growth cycle.

Since 2020, the landscape of the global cannabis industry has changed and the period has been highlighted by a significant increase in the number of countries that have legalized some form of cannabis (i.e. cannabidiol or CBD, medical cannabis, and recreational cannabis). 

Another major change to the sector since 2020 is related to the number of mergers & acquisitions (M&A) that have been completed as well as the rationale for the transaction. From 2017 to 2018, the vast majority of M&A deals in the sector were Canadian Licensed Producers (LPs) and some of these transactions were valued at more than C$4 billion. The primary rationale for these deals was based on the amount of cannabis the combined company could produce and we did not agree with the logic. 

Fast forward to 2022 and the landscape of the M&A market in the cannabis industry has completely changed. Most of the deals between Canadian LPs did not pan out as expected and now, companies are focused on acquiring businesses that have visible synergies and are immediately accretive.

Today, we highlight 3 companies that have been active in the cannabis M&A market and provided an in-depth look at how the transactions made more sense than what we witnessed in Canada in 2017 and 2018. We believe these 5 operators provide a differentiated perspective on the potential of the M&A market in the cannabis industry.  

The US is the New Frontier for Cannabis M&A Transactions

Last week, two large-scale US multi-state operators (MSOs) announced a merger that caught the attention of the market. The combined company will be able to compete with leading MSOs and we believe the transaction is a testament to how the M&A landscape of the cannabis industry has changed.

Over the next year, we expect additional M&A transactions to be reported and believe that the US will be at the center of this theme. After analyzing more than 20 MSOs, we determined that Jushi Holdings (CSE: JUSH) (OTC: JUSHF) is one of the most attractive M&A targets for an MSO that wants more exposure to burgeoning markets on the east coast or in the Midwest. 

We would not be surprised if a US operator like Planet 13 Holdings (CSE: PLTH) (OTC: PLNHF) merged with Jushi due to the states that each business is levered to. Since the companies are levered to different states, the combined company would immediately benefit by having a larger footprint in the US. 

From a synergy standpoint, the combination of Jushi and Planet 13 makes sense and we believe the transaction would prove to be immediately accretive. If a transaction like this occurred, we are of the opinion that the combined company would be one of the largest cannabis businesses in the US and will monitor how these stories advance from here. 

Will MedMen be Acquired by the End of 2022?

MedMen Enterprises (CSE: MMEN) (OTC: MMNFF) has been one of the biggest letdowns in the US cannabis industry. We try to avoid using the phrase dumpster fire when referring to a cannabis company, however, MedMen has been the epitome of one. 

During the last year, the US cannabis operator has sold many high-profile cannabis assets to lower expenses and to strengthen the balance sheet. From New York to Florida, MedMen has divested several of its most attractive cannabis assets and we classify the business as an acquisition target. 

A couple of years ago, MedMen was considered to be a unicorn in the cannabis industry and its fall from grace surprised the market. We believe the company is the poster child for how a cannabis company should not operate and expect to see more of its US assets acquired to avoid going out of business. 

We continue to have a less-than-favorable outlook on MedMen and would not be surprised if the rest of the company was acquired in the back half of the year. When the US cannabis operator started to fall apart, a high-profile cannabis company acquired part of the business and we would be surprised if the business is still a standalone company by the end of the year. 

Canada Enters a New Phase of the M&A Cycle 

Although some of the largest M&A transactions in the history of the cannabis industry were between high-profile Canadian LPs, the country is no longer considered to be the global cannabis leader and this has negatively affected its M&A market. 

During the last two years, we have noticed a change in the type of companies that Canadian LPs were acquiring and believe the sector entered a new phase of an M&A cycle. The new cycle has been centered around two themes:

1. Larger LPs acquiring operators which have the leverage to a segment of the cannabis value chain that it had no exposure to
2. Canadian LPs acquiring high-profile US cannabis brands and entering into agreements to have the option to buy a US plant-touching business (once federal legislation changes in the US)

Going forward, we would not be surprised to see specialized mid-tier Canadian LPs acquired by larger operators. We believe the larger LPs will be more focused on acquiring operators that are highly levered to emerging international markets (Australia, the European Union, and Latin America) or own a portfolio of cannabis derivative products (i.e. edibles, concentrates, beverages, vape pens, and more). 

Last year, HEXO Corporation (TSX: HEXO) (Nasdaq: HEXO) acquired Zenabis Global for approximately $235 million. A core reason for the acquisition was the immediate access that HEXO would have to capitalize on medical cannabis markets in the EU. Through a strategic partnership, Zenabis has a state-of-the-art EU Good Manufacturing Practice (GMP) facility to supply pharmaceutical products to the market. The facility also serves as a packaging and distribution center and we are favorable on the reasoning behind the acquisition.