The cannabis industry is set for a wave of M&A after 5 states voted to legalize marijuana. Industry insiders lay out who's going shopping and the types of deals you can expect.

  • On November 3, five states — New Jersey, Arizona, Montana, South Dakota, and Mississippi — voted to legalize cannabis in some form. 
  • This means five new cannabis markets are expected to open up for business soon.
  • Companies are already making moves to either expand their footprint in these states or enter them through mergers and acquisitions.
  • Business Insider talked to analysts and lawyers in cannabis to ask them about the deals we should expect moving forward.
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Cannabis companies are getting acquisitive as they jockey for control of the rapidly expanding legal marijuana map in the US. 

Five states — New Jersey, Arizona, Montana, South Dakota, and Mississippi — passed measures legalizing cannabis in some form on November 3. Overall, 15 states will have recreational cannabis markets, and 36 will have medical cannabis programs, once these latest initiatives kick into effect.

New Jersey and Arizona are the states with the most buzz, industry executives, experts, and analysts say. 

Jennifer Fisher, a partner in the law firm Goodwin's Cannabis and White Collar practice, told Business Insider that she expects to see more M&A activity in those two states in particular. 

"Both states have indicated that they want to move quickly for adult-use sales and that means existing licenses are well-positioned to either become acquisition targets or grow themselves," Fisher said. "It'll be interesting to watch and I think everyone is going to be looking to those states and the operators in those states to see how they can take advantage of those positions." 

Arizona is fertile ground for M&A activity

Arizona has seen a lot of action already. The state voted to legalize recreational cannabis, and has allowed medical marijuana since 2010 year. Marijuana Business Daily estimates that Arizona's cannabis market could reach $790 in annual sales by 2024.

Companies with a heavy footprint in the state, like multi-state dispensary chains Harvest Health & Recreation and Curaleaf, and grower Copperstate Farms, have announced acquisitions of dispensary licenses or construction and expansion plans to prepare for the new market.

Ayr Strategies, a multi-state cannabis company, acquired three Arizona dispensaries the day after the election.

Legalization also creates opportunities for companies that serve the industry, but don't handle marijuana themselves. Grow Generation, which sells cannabis cultivation equipment, bought Hydroponics Depot, a large garden store in Phoenix, in October. 

Read more: An inside look at what marijuana legalization's election sweep means for the future of the multi-billion dollar industry

Fisher said that it's going to be difficult for new players to enter Arizona unless they acquire existing medical licenses in the state, because of how the law is written.

The state also limits early applications for its recreational market to those currently operating in the state's medical cannabis program, meaning those that already have a footprint there will get a leg up over any newcomers.

'There's going to be a race to consolidate this industry'

Cannabis firms are also likely to make deals in New Jersey, where cannabis legalization is predicted to create a recreational market worth almost $1 billion by 2024, according to Marijuana Business Daily. Companies may also expand in other Northeastern states, in anticipation that they'll also legalize cannabis, Fisher said.

Should that happen, Fisher said she expects the industry to look for ways to enter the New York and Pennsylvania markets "in big and significant ways." 

"Overall, we're seeing a greater trend toward an uptick in M&A, both in anticipation of last Tuesday and looking at the market ahead," she continued. "It was really quiet for a while but I think people are feeling more positive about the way the industry is going."

Jason Akerman, the CEO of TerrAscend, a Canopy Growth-backed cannabis company with operations in New Jersey and California, among other states, said he expects to see more deals.

"I think there's going to be a race to consolidate this industry," Akerman told Business Insider. 

Read more: 9 top cannabis execs break down what marijuana's election sweep means for their companies and the industry's future in the US

Two main types of companies are likely to strike deals, said Kenneth Shea, a senior industry analyst at Bloomberg Intelligence. Shea said he expects M&A activity from Canadian LPs, like Canopy Growth, and US multi-state operators (MSOs), like Curaleaf or Green Thumb Industries.

Since cannabis is federally illegal, companies that sell or cultivate THC in the US aren't allowed to list on marquee exchanges like the NYSE and Nasdaq, meaning the pool of capital that US companies have to draw from to pursue flashy acquisitions is limited compared to their Canadian peers.

So far, Canadian cannabis companies like Canopy Growth, Aphria, and Tilray have struck partnerships or invested in companies that give them footprints in the US. Their ability to profit from those arrangements by selling cannabis is limited, because the drug is federally illegal.

Canopy Growth has an agreement to take over US cannabis company Acreage Holdings once it is federally permissible to do so. The Canadian cannabis giant also sells branded CBD gummies in the US under a partnership with lifestyle guru and ex-convict Martha Stewart. 

Read more: The ultimate guide to marijuana legalization: Here are all the states that passed cannabis reform, the key dates to know, and which stocks could benefit the most.

Last week, Aphria acquired Atlanta-based craft brewer SweetWater Brewing Company in a bid to establish its footprint in the US ahead of legalization. Eventually, the aim is to use SweetWater's branding and distribution to sell THC beverages, though that's not possible right now,  Aphria CEO Irwin Simon said in an interview with Business Insider.

"I think the next big drink is THC club soda that millennials will drink," Simon said. "And I want to be ready to pounce on that, if and when that happens."

Bloomberg's Shea also said that because Canadian companies have cut their headcounts and made themselves leaner over the past year or so, they're much better positioned now to pursue acquisitions in the US — especially since they can tap deep-pocketed institutional investors, unlike their US counterparts. 

US MSOs want to "expand as fast as they can" into new markets

However, US firms like Curaleaf, Trulieve, and Green Thumb Industries still want to "expand as fast as they can" into newly legal state markets, Shea said.

"There's a lot of advantages to being the so-called first mover, or at least to get there early anyway, before the crowd," he said. "It's just faster to do it through acquisitions than it is to do it organically." 

As for the companies that are ripe for acquisition, Shea said that the more established companies that have brand recognition and big market shares are likely going to be the most attractive.

While Shea says he doesn't expect any mammoth mergers between US cannabis companies — like the industry saw in 2018 — he says there will be some level of in-state consolidation, especially in states with limited licenses.

Read more: Wall Street analysts pick the top 6 US cannabis stocks to bet on now to profit from a Biden victory and a wave of legalization

The industry is better positioned to make deals now relative to even a few months ago, said Marc Hauser, co-vice chair of Reed Smith's cannabis law team. 

After the cannabis frenzy of 2018, market valuations crashed and distressed companies were cutting costs. Now, companies have stronger balance sheets and are enjoying higher consumer demand. In such an environment, Hauser told Business Insider, acquisitions become more attractive.

Analysts say the time for US cannabis companies to expand is now

Without federal legalization, Hauser said the current environment is ripe for US cannabis companies to expand, because the patchwork of state regulation gives them an advantage and limits competition.

"I imagine that every big or even mid-sized MSO is trying to think, 'How do I take advantage of this? How do I move into these areas," Hauser added.

Analysts at the investment bank Stifel said that if, or when, the US federally legalizes marijuana Canadian cannabis companies and deeper-pocketed consumer companies may come in and compete by starting their own cannabis brands or acquiring MSOs outright. That's unlikely if Republicans keep control of the Senate.

Read more: The world's biggest cannabis companies are jockeying to dominate the $61 billion US market after marijuana legalization swept 5 states

"We believe descheduling would upend the current US industry suggesting enhanced competition for MSOs in sustaining and furthering their positions with the competitive threat from large established U.S. consumer companies," the Stifel analysts wrote in a recent note.

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