A Consolidation of the Cannabis Industry Is Likely in the Months Ahead
* Rescheduling is happening, hemp might be going away, the illicit market is finally going to be addressed, cannabis pricing is likely to rise, credit cards are being introduced and synergistic industry mergers lie ahead (we expect $VRNO to be one of the first to be acquired)
* Buying cannabis stocks today is getting ahead of these and other favorable factors and developments
* By accumulating cannabis stocks today we are getting in front of institutional capital, which is going to come into the sector…
Yesterday I outlined my optimism about the cannabis space (I Want to Take You Higher)
In that column I highlighted the case for industry takeovers and consolidation:
* The equity capitalization of the five largest cannabis players only totals about $5.5 billion!
* I expect industry consolidation over the balance of the year and it is not out of the realm of possibility that tobacco or consumer packaged goods companies try to get a toehold in the cannabis sector through the takeover of several of the top-five individual cannabis companies.
After the close, my friend Shadd Dales of The Dales Report hosted Curaleaf’s ($CURLF) CEO Boris Jordan, who made a very strong case that we will see a swift consolidation and robust merger activity in the cannabis industry (upon rescheduling and the determination and (FinCen) guidance for some retroactive relief of U.S. uncertain tax positions (UTP)/liabilities): (starting at the 26 minute mark)
“M and A is definitely happening. Our job is to make our companies the best in the industry but there is no question that this industry is primed for consolidation. It’s going to happen, 100%. The benefits of the merger of two big MSOS – $150 million to $200 million of free cash flow drops to the bottom line after eighteen months. This industry makes no sense in having so many participants and existing in its current form. Already, all of our growth facilities are full (we are at 110% of growth capacity) and we are getting more efficient (we used to grow 50 grams/sq feet and we are now at 150 grams/sq feet) – double the efficiency of two years ago. We don’t have enough capacity. By bringing two companies together (instead of building another $100 million grow) is good for pricing… it’s the right thing for the industry. It’s a 2027 issue and it will happen quickly.
I have already approached top MSOSs for deals. Curaleaf would be better off being twice the size of its current state…
The tobacco companies need the cannabis companies, it’s a similar business (Altria and Philip Morris are already in the business. Japan Tobacco is looking around. Strategics will be buying. What will happen is that in the U.S is that we will ultimately have two or three major players.”
– Boris Jordan, Curaleaf CEO
Parenthetically I expect one of our largest individual positions (Verano Holdings ($VRNO) to be one of the first large MSOSs to be acquired.
Post Script
Back to fundamentals. I highlighted that an important investing case was that cannabis fundamentals are stabilizing and beginning to improve, which we clearly saw in yesterday’s release of Curaleaf’s second-quarter report.
Curaleaf (which I am long) reported much better than expected quarterly results on Thursday and the shares responded in kind (+9%).
Position: Long MSOS (VVL), MSOX (S), CURLF (VS), VRNO (S) GTBIF (S/N), TRLV (S/M), TSNDF (VS), GLAS (S)
