Cannabis mergers and acquisitions are making a comeback after a turbulent few years for the industry.
Over the past several months, multibillion-dollar deals like Tilray's merger with Aphria and Trulieve's acquisition of Harvest Health & Recreation may have opened the floodgates for more M&A.
Special-purpose acquisition companies, aka SPACs or blank-check companies, have also provided midsize US cannabis companies opportunities to go public by bypassing the traditional initial-public-offering process. SPACs pool capital from investors and have a limited timeframe, usually 18 to 24 months, to invest in target companies. Notable SPAC roll-ups in recent months include Subversive Capital's acquisition of Caliva and Left Coast Ventures.
To understand the future of cannabis M&A, Insider interviewed seven top lawyers who've advised on some of the industry's bigger deals. The lawyers all work for firms on our list of the top law firms in cannabis. They told Insider to expect more deals in the coming months as capital rushes into the industry and investors express optimism over a Biden administration and a Democratic Congress.
They also anticipate more regulatory clarity around the status of marijuana in the US, which could bring in new investors. The global market for medical and recreational cannabis products is expected to hit $104 billion by 2024, according to Prohibition Partners, a market intelligence firm.
"Building on the trend that we saw toward the end of 2020 into 2021, I think we'll continue to see greater access to capital among the US players," Aaron Sonshine, partner and head of the cannabis-law practice at Bennett Jones, told Insider. "There's a significant pool of capital that we see entering the space for the first time following Biden's election and the Georgia Senate races."
Marijuana legalization has been floated, but smaller wins may come first
Cannabis remains federally illegal in the US, although people are allowed to use it for medical purposes in 36 states, and for adult use in 16 states.
Since Democrats took control of the White House and Congress, the cannabis industry has seen a steady influx of cash, prompting a flurry of deals. A smattering of states voted to legalize cannabis in the November elections and several more have moved to legalize cannabis in the months since.
Lawyers told Insider that this landscape has the potential to spur more M&A and SPAC deals in the coming months and that they expect more regulatory clarity around the status of marijuana in the US.
While the US House of Representatives passed a bill last year known as the MORE Act, which would have legalized marijuana on the federal level, it died in the Senate. A new version of the bill was introduced in the House last month, but Democrats have competing priorities, including infrastructure and family-support bills proposed by the Biden administration.
Some lawyers think more regulatory clarity could emerge this year when it comes to hemp, which was legalized in 2018, and CBD, a compound derived from hemp that doesn't get you high but has been touted for wellness purposes.
Stefanie Fogel, one of several lawyers at DLA Piper who advises cannabis and hemp clients, said marijuana legalization could take years. The US Food and Drug Administration has approved one CBD-based medication, Epidiolex, and has warned people about the risks of using CBD, but has said it is still gathering data about the substance and its effects.
"There's such an active lobby, and such a demand in the health and wellness space to have access to CBD and hemp-related products that I'm hopeful we'll get to that sooner," Fogel said.
Broadly speaking, Jonathan Sherman, a partner at Canadian firm Cassels Brock & Blackwell, says that legalization in the US is a question of when not if.
"I don't think there's any question sitting here today that US legalization will happen," Sherman said. That's led to an uptick in reach outs from clients in other industries, like banking, consulting, and consumer packaged goods, who want to lean on the firm's expertise in the cannabis industry.
"People do not want to be behind the eight ball," he said.
Overall, Sherman says that the perception of the cannabis industry among investors and the corporate world has come a long way since the firm worked with its first clients in the industry in 2014. Cassels — led by Sherman and partner Jamie Litchen — advised on Canopy Growth's blockbuster transaction to take an equity stake in US cannabis firm Acreage Holdings in 2019.
"It's to the point where banks, stock exchanges, audit firms — everybody wants to make sure they're not last to the party because it's a massive industry already," Sherman said.
The Canadian market is going to see more deals and product innovation
In Canada, Kathleen Keilty, partner and cochair of the cannabis group at Blake, Cassels, and Graydon, told Insider that she expects companies to try to become profitable and remain competitive amid oversupply in the market. Keilty advised on the $3.9 billion merger between Canadian cannabis giants Tilray and Aphria earlier this year.
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"There are many companies that have good assets but have struggled to be profitable in the face of oversupply," Keilty said. "I think some of our clients and companies in the sector are looking at potentially combining with other companies in order to remain competitive."
She added that Canadian companies are working to build up different product offerings like edibles and beverages as they gear up to enter the US market when that becomes permissible.
"Some of these companies are trying to make sure that they're up to scale in anticipation of potential US federal legalization so they're of a size that would be more suitable and capable of kind of moving into that larger US market."
The blockbuster deals will grab headlines, but most of the deals over the next year will be a flurry of smaller M&A transactions
Norbert Knutel, partner at Blake, Cassels, and Graydon, added that we may see companies use deals to add product lines. Knutel worked on Subversive Capital's acquisition of Caliva and Left Coast Ventures, which was valued at $425 million.
"Sometimes it just becomes easier and more efficient to acquire someone," he said. "And you can add that to your suite quicker and get to the point quicker than doing it yourself."
Though we've seen blockbuster deals in the Canadian cannabis market in recent months, like the Tilray-Aphria merger, Knutel said he expects the vast majority of the deals over the course of the next year to be smaller.
"The big ones will grab the headlines. I don't think there's going to be tons of them," he said. "But the little ones, I think that that's where all the volume and all the activities are going to be in the coming months.
Steve Tonsfeldt, a partner at Cooley who advised Tilray on the Aphria deal, cautioned that while his visibility was limited to the deals coming across his desk, some of the biggest players have already merged. "I think it's very possible that the first wave of the consolidation actually has crested," he said.
Cassels partner Litchen said she expects more "large scale" M&A between Canadian companies like Tilray and Canopy Growth and US cannabis companies as the US moves closer to federal legalization.
"The US is just the next big opportunity that everyone sees as right in front of us," Litchen said. "But once the US does something, the rest of the world tends to follow."
Expect more SPAC deals
Bennett Jones' Sonshine told Insider that although the SPAC market has softened over the past few months, he expects more deals in that area in the coming months. Sonshine worked to put together Cresco's acquisition of Origin House.
The participants will be a combination of previous SPAC leaders raising second or third SPACs and new entrants, he said. The competition over just a handful of SPAC acquisition targets will be intense.
"You need to be innovative," Sonshine said. "You need to be distinctive and have a clear message on why investors should place their trust in you, right?"
That trend, Sonshine said, coupled with the flurry of M&A deals he expects will happen over the next year, will give smaller and midsize companies plenty of exit opportunities.