What’s causing the decline in M&A activity in the cannabis industry?

Mergers and acquisitions in the cannabis industry in 2024 totaled $1.169 billion, a decrease of $579 million – or 33% – from the $1.749 billion of industry M&A the previous year, according to Viridian Capital Advisors.

What’s behind the decline?

There are several factors, according to Frank Colombo, managing director at Viridian, a New York-based, cannabis-focused investment banking and data analytics firm, who spoke with MJBizDaily about the cannabis industry’s decreasing M&A activity and what it means moving forward.

What are the biggest reasons behind the decline of cannabis M&A in 2024?

Cash is very tight. Over the last two years, cannabis companies have been in cash conservation mode, and a lot of deals have been canceled.

The motivation for M&A has also changed.

Going back in time, it was kind of a land grab, companies wanted to be in every state. Now it’s more of a concentration game.

The poster child of the land-grab movement was Acreage (Holdings, a New York-headquartered multistate operator now owned by Canopy Growth Corp.).

A few years ago, Acreage had more states on their map than practically anybody. But they were an inch deep and a mile wide, as they say.

The MSOs have figured out that you just can’t be profitable that way.

You have to have concentration in a market to really take advantage of it.

You basically have to have a sizable presence and vertical integration.

And you’re not going to be able to do that if you just have one or two dispensaries here and there.

What a lot of these companies have been trying to do is really pick their shots and try to go big in those markets.

What else has dampened M&A?

The other thing that has restrained things are stock prices. You need cash or stock to finance an acquisition.

Cash is tight because it’s hard to raise money. You can’t really sell equity in this market because we’re at all-time lows now.

Stock is not an attractive currency to use because your stock is not worth what it ought to be.

You can go out and borrow money, or you can use seller notes – and a lot of people did – but you’re starting to see a lot of these MSOs have gotten to the point where they are borderline over-leveraged.

Businesses don’t really want to take on more debt. They can’t sell equity. They don’t want to use equity in an acquisition.

So how do they continue to do acquisitions?

The answer, in a lot of cases. is that they don’t.

They’ve decided to concentrate on building out the places they already have and spend some judicious capex (capital expenditures), making sure that operations are as efficient as they can be.

Do merging cannabis companies typically integrate well?

Integrating any companies in an acquisition is always hard, no matter what industry you’re in.

The data pretty clearly shows that the majority of large acquisitions in America, not just in cannabis, fail. And it’s because of this integration.

On paper, it looks good.

But then you start trying to meld the two cultures of people together and decide who’s going to run that area and who’s going to run this area?

And somebody’s pissed off, and you have different underlying accounting systems and control systems, and it’s just so much harder to get these deals to work.

But look at Vireo (Growth), which had operations in Minnesota, New York and Maryland.

In December, they announced four acquisitions – one in Utah, one in Missouri, one in Nevada and one in Florida.

Those are all new operations.

They’re all in markets where those four companies don’t have anything to do with each other. They don’t compete, they don’t cooperate there, they just don’t relate to each other at all.

So, there’s no integration issues here, because they’re not going to try and put their own people in to run the Utah operation. They’re going to let Utah run Utah. Nevada runs Nevada.

Only at the very high level of maybe some capital allocation are they going to try and manage this thing at all.

What other types of acquisitions are you seeing?

The other thing that we see happening is intrastate M&A, consolidation within states.

Lots of little companies in Missouri are combining together to make a bigger entity. We see the same thing in Michigan.

Not so much in Massachusetts, because of the screwed-up laws of Massachusetts.

In Massachusetts, you can only have three dispensaries and 100,000 square feet of canopy.

So, everybody who wants to be in Massachusetts is already in Massachusetts.

If you want to sell your company in Massachusetts, the list of MSOs you can go to, it’s an empty set.

There’s nobody left that’s not already there.

You’re forced to be talking about trying to sell it to private companies or to combine with smaller companies.

That’s part of the whole story of what’s restraining M&A.

Why is hemp-derived THC M&A down?

It’s smaller, private companies that are fueling that market.

And they have not yet gotten to the point where they’re consolidating from an M&A point of view.

You have a lot of smaller competitors there making these products that are going into the convenience store chains, gas stations and whatnot.

And we just have not yet seen them start to consolidate and do M&A.

How’s the outlook for cannabis M&A this year?

The overall restraint on stock prices, the challenges of getting any reform done in Washington, D.C., industry revenues are flat to down, margins are down.

So, going out and making yourself bigger in that environment is just not that attractive right now.

Over the long term, we’ve got to have consolidation in this business still.

A bunch of people have said this, but I agree with it.

I think you end up with an hourglass-shaped industry where there’s a lot of concentration of big companies and there’s a bunch of little craft growers in the bottom, and there’s not that many in the middle.

This interview has been edited for content and clarity.

Omar Sacirbey can be reached at omar.sacirbey@mjbizdaily.com.