How Mergers And Acquisitions Will Redefine The Cannabis Space In 2019

Nothing makes investors more excited than Mergers and Acquisitions. A big M&A has the potential to completely change an industry and provide a big pay-off for investors. Companies like Altria Group Inc (NYSE: MO) and Constellation Brands Inc. (NYSE: STZ) are looking to enter the cannabis sector via innovative brands like Canopy Growth Corporation (NYSE: CGC). Other, lesser known companies, like PotNetwork Holdings, Inc., are also well placed to take advantage of the interest of corporate giants. 

Big brands want to enter the cannabis sector 

Canadian legalization was just the beginning. The cannabis sector is beginning to snowball and attitudes in major markets are rapidly shifting in favor of legalization. In the United States, the Federal Government has already taken steps to legalize CBD products via the iconic Farm Bill and attitudes across major European economies continues to relax. The global legal cannabis market is predicted to be worth $146.4 billion by 2025. Cannabis legalization represents an opportunity for industries like tobacco and alcohol. Both industries have experienced declining sales, and recreational marijuana offers a way to reverse this situation. They will have to compete with existing operators and other entrants interested in the ancillary cannabis sectors, CBD for example. Companies who don’t move now will be forced to pay a premium and there’s already been a flurry of activity. 

Altria Group Inc. is Big Tobacco’s First Mover

Times have never been tougher for Big Tobacco. As public health campaigns take hold, smoking rates in developed economies have plummeted. The industry has also been disrupted by the emerging e-cigarette market, which threatens to further cut into their bottom line. 

Altria has already taken steps to combat the impact of e-cigarettes with a direct investment of $12.8 billion in Juul. The investment gives Altria a 35% stake in the largest e-cigarette producer. Altria’s investment in Juul is a clear attempt to take ownership of a potential threat but they also see real opportunity in the cannabis sector. 

In December 2018 Altria made their first foray into the cannabis sector with a $1.8 billion investment in Cronos group. This secured the tobacco giant an ownership stake of 45% in the group. 

The deal was mutually beneficial. Altria gained an ownership stake in a potential rival and Cronos Group gained access to Altria’s expertise and a significant capital injection. The cannabis firm was particularly interested in Altria’s experience with vaping and e-cigarettes and saw an opportunity to develop customized vaporizers for their cannabis products. 

Cannabis and tobacco companies represents natural partnerships. Tobacco companies have experience in dealing with complicated regulatory hurdles and have access to vast distribution networks. 

Other major tobacco companies, like Philip Morris International, have yet to make their first moves into the marijuana industry. Philip Morris is more interested in promoting its IQOS heated-tobacco system but other Big Tobacco companies will soon be forced to follow in Altria’s footprints or be left behind. 

Constellation Brands Is Betting on Cannabis Beverages

Like Big Tobacco, alcohol firms have been struggling with declining demand for their products across developed markets. Health concerns surrounding alcohol have hastened declining drinking rates.

In the UK, the number of people drinking more than 14 units fell by 6% in 2016 and beer sales in the United States have fallen for the last 5 years straight. Sales of non-alcoholic beverages have skyrocketed in response and many alcohol companies are developing their own alternatives.

Beverage companies are particularly interested in marijuana infused beverages, a market that is predicted to be worth 0 million in the US alone by 2022. In 2016, Constellation brands secured a 38% stake in Canopy growth through a massive billion investment. This move placed marijuana at the heart of Constellation’s growth strategy.

Constellation’s incoming CEO Bill Newlands stated that he believes the emerging cannabis space represents one of the most significant global growth opportunities in our lifetime during a speech to investors.
Initially, Constellation will be focusing on the Canadian market as it is not yet legal to sell THC products in the United States, but that doesn’t mean that the company is not eyeing up opportunities south of the border.
The Farm Bill has opened up incredible opportunities for cannabis companies to claim a stake in the lucrative U.S. market. Canopy Growth in particular, has secured a Hemp License in New York and plans to make investments of 0 million or more in the United States Hemp industry.
For its part, Constellation brands has shown interest in creating CBD infused beverages for the U.S market. Canopy Growth is already one of the world’s largest CBD producers so both companies are in a good position to take advantage of this emerging market.