The 5 Largest Marijuana Deals in History
The marijuana industry is absolutely blossoming before our eyes. This year alone, according to a research report released earlier this year by Arcview Market Research and BDS Analytics, global sales should soar by 38% to $16.9 billion. This roughly $4.7 billion year-over-year improvement is the result of sales picking up in the now recreationally legal Canada, supply chain issues resolving in California (the largest legal market in the world), and ongoing legalizations in both the U.S. and overseas markets.
But if there's one common theme throughout the cannabis industry in North America, it's that it's overcrowded. Beginning last year and continuing into 2019, consolidation among marijuana growers and retailers, as well as investment dealmaking and partnerships, is expected to really pick up. With this in mind, let's look at the five largest deals in the cannabis space to have been announced or closed so far.
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1. Constellation Brands invests in Canopy Growth: $4 billion
Without question, the largest marijuana deal in history was the equity investment from Modelo and Corona brewer Constellation Brands (NYSE: STZ) into Canopy Growth (NYSE: CGC) -- which, with a $15 billion market cap, is easily the largest pot stock at the moment.
Constellation's fascination with Canopy Growth actually began in October 2017, when it took close to a 10% stake in the company for about $190 million. Constellation then, somewhat indirectly, invested into Canopy a second time in June 2018 when it gobbled up a third of a $600 million Canadian dollar ($449.2 million) convertible debenture offering. Since these notes can be converted into shares, it gave Constellation a means of increasing its ownership presence, even with the potential for share-based dilution. Then, this past August, came the creme de la creme of investments: a $4 billion equity stake.
After closing in November, Constellation now owns a 37% stake in Canopy. Furthermore, warrants were issued with the equity investment that, if exercised, could allow Constellation to lift its stake to 56%. This investment was seen by many as a logical extension beyond alcohol for Constellation Brands.
Meanwhile, Canopy Growth gets a much needed infusion of capital to expand into overseas markets, diversify its product line, market new and existing brands, and make complementary acquisitions. This cash will be particularly handy as Canopy pushes legally into the U.S. marketplace via hemp processing. Canada's largest pot stock won a hemp production and processing license from New York State in January, and the cash it's received from Constellation will help build a processing facility and the infrastructure needed to become a major hemp player in the United States.
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2. Aurora Cannabis acquires MedReleaf: $1.98 billion
As for the largest acquisition in history, that belongs to Aurora Cannabis (NYSE: ACB). Announced in May 2018 and completed by July, Aurora acquired Ontario-based MedReleaf in order to boost its production capacity and expand its product portfolio. Initially touted as a CA$3.2 billion deal, it fell in value as Aurora's stock dipped. Since Aurora regularly uses its common stock as a financing tool, the final price paid was just shy of $2 billion U.S.
Buying MedReleaf brought three facilities into the fold. The Markham and Bradford facilities can combine for about 35,000 kilos in peak annual production. However, just three months before the initial deal was announced, MedReleaf purchased 164 acres of land, 69 acres of which housed the Exeter facility. In need of retrofitting for cannabis growth, as well as licensing from Health Canada, Exeter is expected to yield 105,000 kilos annually upon completion and full operation.
Additionally, the 95 acres of unused land adjacent to Exeter could one day house a facility that's 1.5 times its size. Considering that Aurora's superior growing and constructing techniques have led to yields of around 125 grams per square foot in its larger facilities -- a 25% improvement over the industry-average yield -- it's possible that this unused land may one day yield closer to 200,000 kilos in added annual capacity, assuming demand merits it.
MedReleaf also had a well-established lineup of premium cannabis products for the medical community. Since premium pot generally has a higher price point, adding this portfolio of products made sense from a margin perspective.
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3. Altria invests in Cronos Group: $1.8 billion
In the last of the billion-dollar deals, tobacco giant Altria (NYSE: MO) closed on its $1.8 billion equity investment in Cronos Group (NASDAQ: CRON) in March.
Altria has been contending with a steady decline in cigarette shipment volumes in the U.S. for years, and has only been able to mitigate this decline with higher prices for its premium Marlboro brand, as well as incessant cost-cutting. Rather than continue this path and hope for the best, Altria sunk $1.8 billion into Cronos Group with the expectation that the duo will work on vape products and other alternative consumption options in the near future. When the deal closed, Altria owned a 45% stake in Cronos Group, with warrants issued allowing it to boost its stake to 55%, if exercised.
On the flipside, the cash infusion from Altria is a game changer for Cronos Group, which ended its most recent quarter with less than $25 million in cash. With plenty of capital now on hand, Cronos can focus on pushing into overseas markets, potentially lifting its 120,000 kilos in peak annual production, and further diversifying its portfolio of products. I've made no secret of my belief that Cronos hasn't done well in its international push or in the production department, but this cash offers it a second chance to redeem itself.
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4. Harvest Health acquires Verano Holdings: $850 million
Just about four weeks ago, the largest U.S.-based cannabis deal in history was announced when vertically integrated, multistate dispensary Harvest Health & Recreation (NASDAQOTH: HRVSF) offered to acquire privately held Verano Holdings for the tidy sum of $850 million. Subject to approval, Harvest Health will pay for this buyout entirely with its common stock.
The impetus for this deal is simple: brand-name expansion. If there's one area of the cannabis landscape that's seeing all-out escalation in terms of consolidation, it's the vertically integrated dispensary space in the United States. When the deal closes, Harvest Health expects to have 30 open dispensaries, eight operating cultivation farms, and seven processing facilities. But by year's end, it should have 70 open stores, 13 grow farms, and 13 processing facilities.
Looking even further down the road, Harvest Health will own 123 retail licenses spanning 16 states, and in total can run close to 200 facilities (including grow farms and processing facilities) as a direct result of this acquisition.
Another logical reason for the purchase is that it can take quite a bit of time for states to approve cultivation, processing, and retail licenses/permits. By purchasing a similarly modeled business that's already gone through these steps, Harvest Health is reducing the time it's going to take to expand its presence into new markets.
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5. Cresco Labs acquires Origin House: $823 million
Last, but certainly not least, earlier this week we received word that vertically integrated multistate operator Cresco Labs (NASDAQOTH: CRLBF) would be purchasing Origin House (NASDAQOTH: ORHOF) for CA$1.1 billion, or about $823 million. As with pretty much all deals of this magnitude, Origin House shareholders are set to receive shares of Cresco Labs, meaning the final value of this transaction could change significantly, depending on how Cresco Labs' stock performs in the weeks and months ahead.
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