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US cannabis companies are rapidly pursuing acquisitions to fend off their northern rivals.
- US cannabis companies are going public and pursuing large acquisitions worth hundreds of millions in a race to scale up and capture what some Wall Street analysts say could be a $75 billion market.
- But there is a threat on the horizon: the biggest publicly-traded Canadian cannabis companies are shoring up their balance sheets to enter the US market, if, or when, federal law changes.
- All signs point to war.
There's a war brewing in the cannabis industry.
US cannabis companies are going public and pursuing large acquisitions worth hundreds of millions almost every day, in a race to scale up to capture what some Wall Street analysts say could be a $75 billion market in the US alone.
But there is a threat on the horizon: the biggest publicly-traded Canadian cannabis companies, many of which reported earnings last week, are shoring up their balance sheets to enter the US market - and they're not planning on taking any prisoners.
Take a look at all the activity:
- Acreage Holdings, a US cannabis company that counts former Republican Speaker of the House John Boehner (among other notable former politicians) on its board, last Thursday, began trading on the Canadian Securities Exchange (CSE), after completing a reverse merger with Applied Inventions Management Corp.
- Green Growth Brands, an Ohio-based cannabis retailer backed by the billionaire Schottenstein family, began trading on the CSE last Tuesday after completing a reverse merger with Xanthic Biopharma.
- Green Thumb Industries (GTI), an Illinois-based cannabis retailer, closed a $290 million acquisition of three dispensary licenses and two cultivation facilities in Nevada last Tuesday.
Many cannabis CEOs and investors point to the midterms as a sign that the federal government, spurred by the firing of former Attorney General Jeff Sessions and a new, Democratic-led House, will start to ease federal restrictions on US cannabis companies.
If the federal government legalizes cannabis in the US - or if the Farm Bill passes, which would effectively legalize hemp products in the US - then it will be open season for both US and Canadian firms to rush into the market.
Two types of cannabis companies are gearing up for an epic showdown
There are two buckets of publicly-traded cannabis companies: those that operate entirely in the US, known as multistate operators (MSOs), and those that are based in Canada, known as licensed producers (LPs).
In the US, multistate operators, like Acreage Holdings and GTI, operate retail cannabis dispensaries in states where the drug is legal.
Because cannabis is considered an illegal, Schedule I drug by the federal government, major exchanges like the New York Stock Exchange and the NASDAQ won't list companies that operate in the US. In order to tap into public markets, and generate the currency needed to pursue acquisitions, these companies mostly go public on the CSE by merging with companies that are already publicly-traded.
These reverse mergers have fueled an M&A boom as cannabis companies wield their stock in the race to build out their footprints - and create a moat around their business for when the northern invaders come.
Read more: Marijuana companies are using a 'backdoor' strategy to tap the public markets - and it's fueling an M&A boom
In the other bucket are the big Canadian growers, like Tilray and Canopy Growth. Cannabis is federally legal in Canada, so these companies are able to list major stock exchanges like the TSX, NYSE, and the NASDAQ, giving them access to lots of liquidity.
AP Photo/Bebeto Matthews
Brendan Kennedy, third from right in front, CEO and founder of British Columbia-based Tilray Inc., a major Canadian marijuana grower, leads cheers as confetti falls to celebrate his company's IPO (TLRY) at Nasdaq, Thursday, July 19, 2018, in New York.
Both Canadian and US cannabis companies are raring to go once the US market opens up
US cannabis companies operate in "open defiance of federal law," creating an unsustainable long-term situation, said John Vardaman, a former Department of Justice attorney who's now the general counsel at Hypur, a fintech startup that serves the cannabis industry
For that reason, Vardaman expects Congress to pass the bipartisan States Act, which would protect cannabis businesses from federal interference.
And if the States Act passes, Canadian LP's signaled they would be ready to pounce.
Cam Battley, the chief corporate officer of Aurora, a Canadian LP, said his firm was ready to move into the US once federal laws change.
"You're seeing the American system really move quickly now," Battley said on the company's earnings call last week, referring to Michigan legalizing cannabis, and states across the populous East Coast weighing cannabis reform legislation. "My lips are wet, my mouth is watering to get a piece of that."
"Companies such as ours would deploy massive amounts of capital in one single location or two single locations in one or two states and quickly move that product from state to state," Brendan Kennedy, the CEO of Tilray, the largest cannabis company in the world by market cap, said on the firm's earnings call last week.
This, said Kennedy, would give Canadian companies like Tilray a distinct advantage over US companies because they're already publicly-traded on major US exchanges, with deep balance sheets and access to a network of institutional investors.
Meanwhile, US cannabis companies aren't able to ship product between states - even if both states have legalized cannabis. This ends up creating 33 individual state markets, making it difficult and expensive to streamline operations if cannabis becomes federally legal.
US cannabis firms are then put at a "distinct disadvantage" because their operations will be spread out around multiple states and they won't be able to scale as quickly, Kennedy said.
US cannabis companies aren't backing down, however.
Murphy, Acreage Holdings' CEO, said his newly public company has a "balance sheet to match any balance sheet" when asked about whether he's worried about competition from the Canadian players.
While Murphy said all cannabis companies will benefit from changing legislation, he said he's "angling to be in first place."
"And second place for us is the first loser," Murphy said.
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