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There’s a Reason the Marijuana Industry’s M&A is Just Beginning

Consolidation within an industry refers to combining companies to form fewer but larger businesses. Vertical integration is the corporate buzzword for a business owning a major part or all or part of its supply chain. Within the marijuana industry, a vertically integrated cannabis company typically means they own from seed to store. That could include cultivation, lab and extraction, product design, manufacturing, and retail sales. This allows the company control of product consistency and allows streamlining. It may also reduce the overall cost of production.

The cannabis industry both in the U.S. and in other countries is experiencing a period of acquisitions and mergers as the benefits of size, and control of supply and quality, are part of the natural growth of any growing industry. While not all states allow complete vertical integration in marijuana products, those that do are experiencing consolidation across the production stages. For investors in this space, it’s helpful to be clear about what stages companies you are considering investing in are involved. And whether your company may potentially be a target for an acquisition or be more likely to acquire another.

Product Stages of Cannabis Vertical Integration

Flower – the cultivation stage is where life begins for the final product. Companies involved in cultivation are becoming more precise with handling everything from germination through the flower stage.

Extraction – During the lab and extraction stage, the cannabis plant goes through processes to remove the cannabinoids for edibles or production of concentrates.

Manufacturing – Companies involved in producing from extracted cannabis make the final product the wholesale or retail customer receives, usually including packaging. If the final product is in plant form, it will be weighed and labeled.

Retail/Medical – Once products are labeled in compliance with relevant laws, products can be shipped to retail or medical shelves.

Shipping or delivery is not generally viewed as a product stage.

Vertical Integration Laws

In some cannabis-legal states, vertical integration is mandated because it allows for better oversight of the seed-to-sale process. State regulators claim it helps reduce retail facilities from purchasing black market products since businesses are required to produce, manufacture and sell their own products. It has also been argued it helps address federal tax issues since cannabis businesses can’t deduct regular business expenses. Plus, vertically integrated businesses may be able to overlap costs like rent and utilities.

While some states require and others ban vertical integration of cannabis products, a handful of states leave the choice up to the businesses.

Examples of Consolidating Cannabis Companies

In a C-Suite interview recorded in late May 2022, Justin Dye, CEO of Schwazze (SHWZ) sat down with Noble Capital Markets, Senior Equity Analyst Joe Gomes to discuss the company’s overall business strategies and their appetite for M&A. The states Schwazze operates in allow vertical integration,

Mr. Dye and Mr. Gomes discuss how Schwazze currently fills 50% of its own production needs through in-house cultivation, and also the benefits of working with outside suppliers. The company has its own extraction labs and owns 33 stores. Schwazze has been expanding aggressively in the states it serves, and recently (June 1) closed a transaction on a large cultivation facility and dispensary in Colorado. The C-Suite interview, available here, provides insights on the benefits of being a vertically integrated company in this space. The video also helps investors understand Schwazze’s “House of Brands” concept. Schwazze operates in Colorado and New Mexico.

A California-focused retail consolidator and the owner of Mankind Dispensary is GABY (GABLF) Mankind is one of the oldest licensed dispensaries in California. GABY, founded by CEO Margot Micallef is a pioneer in the industry with a multi-vertical retail foundation, and a strong management team with experience in retail, consolidation, and cannabis. Mankind is a well-known, and highly respected dispensary with deep roots in the California cannabis community operating in San Diego, California. GABY is poised to grow its retail both organically and through acquisition. The company curates and sells a diverse portfolio of products. Hear what GABY CEO said in April in her presentation at NobleCon18, available
here. The company distributes its proprietary brands through its wholly-owned subsidiary, GABY Manufacturing. GABY reported first-quarter results today (June 6), Read what Senior Research Analyst Joe Gomes wrote in a research note about the state of the industry and GABY’s results, get
the report.

Take Away

Consolidation within the cannabis industry is strong; mergers and acquisitions in the U.S. last year totaled 209 with a total value of $10.1 billion. Some of the M&A which is still running at near last year’s pace is to provide full vertical integration or improved integration within’ the firm’s specialties.

Ongoing integration is of interest to investors as there are cost savings and improvements that can be had by controlling the production process to lower cost, improve flexibility in the production processes, retain strict consistency, and quickly adjust to changes in demand for particular strains.

Public companies that become acquisition targets can deliver outsized returns to investors. Research posted on Channelchek of Small and Microcap stocks may help identify the strengths and attractiveness of companies involved in the cannabis industry and others covered by Noble Capital Markets veteran equity analysts. Sign-up today for emails and access.

Paul Hoffman

Managing Editor, Channelchek

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