After 2021’s monumental record of mergers and acquisitions, many cannabis industry insiders predicted that the momentum would carry on in 2022. So far, that hasn’t been the case. Compared to last year, the total M&A volume for this year in the U.S. decreased by 62%. Similarly, the number of transactions also went down by 39%.
The figures are according to a New York-based cannabis capital, M&A, and strategic advisory company – Viridian Capital Advisors. The director of analytics at Viridian, Frank Colombo, said that consolidation activities remained relatively healthy. This is especially so when you don’t consider the major deals, such as the $2.1 billion acquisition of Harvest Health & Recreation by Trulieve Cannabis.
The merger of Healthy Lifestyle Brands LLC and Copperstate Farms Management LLC has also kept 2022 fairly active. Additionally, two major deals are also likely to come to fruition soon. These are Verano Holdings’ $400 million acquisition of Goodness Growth Holdings and the $2 billion acquisition of Columbia Care by Cresco Labs. In his September 12 newsletter, Colombo wrote that although 2022 isn’t likely to catch 2021, it is far from being a disastrous year for M&A.
Capital Raises Have Decline
According to the co-founder and managing director of Poseidon Investment Management, Morgan Paxhia, the cannabis industry isn’t the only sector that has seen a decline in M&As this year. There’s a cyclical pattern to these types of deals. Nevertheless, things have been particularly tight for the past 20 months in the cannabis capital markets.
Paxhia further added that the market wants to see the ability of public cannabis companies to operate with a positive cash flow. The high-interest rates and low stock prices have also made things more complicated. Basically, these combinations mean that stock-based M&As are more costly.
The SAFE Factor
The Secure and Fair Enforcement (SAFE) Act is another issue influencing the current market conditions. If the U.S. Congress passes the SAFE Banking reform this year, the financial landscape in the cannabis industry will drastically change. It will likely trigger an upswing in stock prices and the possibility for more institutional investments.
According to the managing director of Cantor Fitzgerald, Pablo Zuanic, SAFE Banking could help small and mid-sized businesses stay afloat and keep off potential acquirers. This will allow companies selling weed accessories and other cannabis products to operate efficiently. For this reason, the industry as a whole would likely revamp within a short span of time.
However, Zuanic added that if the SAFE Banking doesn’t pass, business owners running small to mid-sized firms would be forced to sell or even shut down their operations.
It’s quite difficult to predict the companies that will merge or make acquisitions in the remaining part of this year. Poseidon’s managing director, Paxhia, is mainly keeping an eye on Cresco Labs’ acquisition of Columbia Care as a candidate for an M&A that will likely happen this year.
Although there was a substantial decline in M&As this year, the industry seems to be holding on well. As the fourth quarter commences, many are waiting to see if Cresco Labs and Verano Holdings will follow through with their acquisitions.