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This year we're expecting a massive amount of merger and acquisition (M&A) activity across the board.
All growing industries will deliver a lot of deal-making, with companies either making acquisitions to follow through on growth plans or being bought by a bigger player.
Strategic acquisitions this year will also address the fact that investors want results now. When acquisitions close, that puts revenue on the balance sheets that companies previously did not have.
Cannabis is no exception.
Just take a look at Gaby Inc. (OTCMKTS: GABLF), a California-based consumer packaged goods (CPG) company that takes a unique approach to cannabis and hemp-infused products.
Thanks to several key acquisitions, it grew revenue by a whopping 2,000% in a year, from 289,092 Canadian dollars for the month ended Sept. 30, 2018, to CA$6.2 million for the month ended Sept. 30, 2019.
Now it's time to spot the "next Gaby"…
This Isn't Last Year's M&A
For 2020, we're going to see more selective deals.
And the large companies will be looking for one of four things when they make acquisitions:
- New territories
- High-quality growth assets
- Successful regional brands
Companies will look to build scale in the states they already operate in. They will also seek to enter new states, but with scale.
They will be looking for high-quality growing assets that are attached to equally high-quality product manufacturing assets. They will be looking for successful regional brands that they can export across their platforms.
The days of buying one or two dispensaries to be able to say they entered a new state are over, as are the days of buying grow houses that only offer a promise of being completed.
The grow house is only partially completed right now, but the acquisition is also part of Harvest Health's plan to build scale in Nevada, the most important cannabis market in the world.
Harvest would not make that same acquisition in a state where it didn't already have strength and big plans, and it would not buy a grow house if it didn't expect it to be completed.
Product Companies Will Unite
Most public companies that specialize in finished products, as opposed to growing flower or operating dispensaries, are smaller.
Look for some of these smaller companies to merge – because bringing branded products companies together has several benefits.
The biggest is the ability to create top-flight partnerships in expansion states.
A California-based products company with only a few million in sales will not have the ability to negotiate a favorable licensing deal with a grower in Michigan, for example, and it will not have the scale to acquire its own facilities.
That means it may be better for both parties to join forces.
Some Mergers Will Be Distressed – Both a Risk and an Opportunity
Some cannabis firms just aren't going to make it due to the simple fact that they just won't have enough cash to survive.
For the firms with sufficient capital, they'll be able to either purchase companies outright or purchase assets at dirt-cheap prices.
However, companies on the edge of insolvency sometimes lose some of the controls that make a company trustworthy. That means acquirers will have to do extra due diligence to ensure that they're buying solutions and not problems.
Canada Will Lag Behind the United States in M&A
The M&A wave of 2020 will primarily be an event in the United States. There will be some international mergers, but we don't expect to see nearly as much activity in Canada as we'll see in the United States.
Of course, there will be some exceptions.
Some of the mid-sized companies with good liquidity may seek to increase their footprints and diversify their growing operations. They'll do that by purchasing other companies that did not raise enough capital when it was available.
Most acquisitions will have to pay for themselves very quickly this year.
But that merger will not fly in 2020 – it's simply going to take too long to bring Origin House's brands to the Cresco properties after the deal closes.
Acquisitions in 2020 will either have to be immediately accretive to cash flow or demonstrate that they will be accretive in the very near term. Even a year off is too far.
Some companies will ignore what their shareholders want or not realize that investors are demanding results now. Those companies will be punished by the market.
We'll be looking for the companies that "get it" and make smart, cheap acquisitions that fit into their long-term strategy.
On the seller side, we'll be looking for the gems that are attractive takeover targets.
For example, it's estimated that Colorado will record $1.6 billion in cannabis sales for 2019, making this is a crucial market to be in with the right strategic plan.
And the company we're going to talk about today could become one of the largest vertically integrated cannabis operators in North America. In fact, it made seven acquisitions in September 2019 alone.
With all its planned acquisitions, it'll have some of the best-selling brands in Colorado in its wheelhouse, one of Colorado's largest edible manufacturers, 33 new dispensaries, and a state-of-the-art manufacturing and research & development lab.
Simply put, it'll be a cannabis profits powerhouse…
Medicine Man Technologies Is a Top Pick
Medicine Man Technologies Inc. (OTCMKTS: MDCL) is a U.S.-based cannabis consulting service and technology company located in Denver.
It's a small company with a market cap of less than $110 million, but we're confident we'll be seeing big things from Medicine Man Technologies in 2020 and beyond.
As Members of Money Morning, you're one of the first to get in on this action because we haven't added it to any of our model portfolios yet.
That means you have a chance to get in early. And for those who are really in this for the long haul, take your time and watch the profits come in.
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About the Author
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