Brand M&A: Interest Rising

While the California M&A landscape is still largely focused on the dispensary land-grab, there have been a number of transactions of late that are starting to put CA cannabis brands in the cross hairs of large acquirers. Recent acquisitions of Select, Lord Jones, Moxie, Beboe and Korova have CA brands peering into the crystal ball to contemplate scenarios that create global scale and liquidity. So why haven’t the floodgates opened for canna brands like it has for retail?

It comes down to scale. When KO speaks with MSO’s on their brand acquisition strategy we hear familiar refrains. “There are no brands that have garnered true brand loyalty”, or “We can create brands through R&D”. Many buyers simply believe that paying a multiple for brands that are “regional” is not an effective way to deploy capital. But clearly that sentiment is changing. Why?

First and foremost, some CA brands are starting to achieve “relative” scale. The ability to consistently manufacture high quality products and distribute into CA’s 500+ dispensary network is a challenge unique to the world’s largest cannabis market. Compared to any other State (or Country), this is a level of scalability that highlights the operational strengths of the brands that are separating from the pack. With six quarters of BDS data in the books, it is becoming increasingly clear which management teams are executing and outpacing the growth of the market as a whole. The second is a growing recognition of the “authenticity” of California cannabis. The MSOs (aka the Multi-State Oligarchs) realize their manufactured brands can’t compete with a free-market economy driven by 20 years of product innovation. CA brands have been building those connections for years, and similar to craft beer, story-telling is a big part of brand building and there are very few authentic stories outside of California. Finally, and perhaps most importantly, MSOs now realize that the CA consumer is among the most discerning cannabis consumer in the world. You simply can’t fool well-educated consumers who grew up with cannabis, making CA the most challenging test bed to launch and establish a brand. So rather than bucking the trend they are embracing the trend.

Jamie Mendola, who leads the acquisition efforts for Mercer Park, a $400mm SPAC focused on acquiring a portfolio of leading brands, is focused on filtering through the thousands of “products” to find promising brands that have the authenticity, quality and marketing to appeal to cannabis consumers across the country. “We believe that California will be the epicenter for national brands, particularly as some of the larger East Coast and Midwest states transition to adult-use. Leading brands need to be thinking about how to win in CA, but also how to navigate the supply chain, marketing and licensing challenges as they expand into other states.”

When it comes to valuation it is important to distinguish between valuation and terms, as they vary greatly by deal. The transactions with Select, Moxie, Beboe and Korova were all stock deals, making them effectively mergers with limited short term liquidity and where the headline valuation can be impacted dramatically by the stock performance of the acquirer. Cronos’s $300mm acquisition of Lord Jones, on the other hand, represented 15x revenues with 75% of the consideration in cash! Of course Altria’s $1.8 billion investment into Cronos had something to do with that. For those looking for heavy cash components the market remains tight due to volatile Canadian capital markets. But meaty valuation multiples are out there – particularly for those that have proven the ability to scale. For those who haven’t, mergers with like-minded entrepreneurs is looking like a viable alternative.

Bottom line? The signs point to change and the large CPG brands are starting to hover. As we get closer to legislative breakthroughs on a national level these forays’ are only going to accelerate. Investment has already occurred in the beverage market (mostly via Canada) and will soon cross over to the other market segments. A lot of cash is sitting on the sidelines once the dam breaks – fasten your seat belts!