
HAS THE GREEN RUSH GONE BUST?
The View from the 50 States and a Glimpse into the International Future © Douglas Smurr Mergers and acquisitions in the U.S. cannabis market are taking a major pause compared to last year. Following Tilray’s purchase of Aphria for $2.4 billion in April 2021, came the mega deal of Dublin-based global pharma company Jazz Pharmaceuticals’ acquiring UK based GW Pharmaceuticals in May for $7.2 billion, that was followed by Trulieve’s October $2.3 billion acquisition of Harvest Health and Recreation. In comparison, 2022 has seen a drastic downturn. The sole notable deal in 2022 has been Cresco Labs’ March acquisition of Columbia Care for $2.1 billion. So why the slowdown? Six endemic stress points are causing the 2022 decline of the cannabis sector.2021 Cannabis Mergers and Acquisitions by Market Sector

The Economy
FIRST, the uncertainty that has crept into the entire economy is causing the large cannabis companies to jettison underperforming assets before a possible economic correction may render such unattractive entities only worth pennies on the dollar, or simply unmarketable. The current prevailing mindset is to survive — not to grow — by increasing capital reserves to hedge off any overall slowdown to the economy. Who are the big players? As of August 2022 the 10 largest publically traded cannabis entities according to the latest U.S. Security Exchange Commission or Canadian Securities Administrators filings based on company revenue and income are
Politics
SECOND, Congressional inaction, especially the repeated inability to pass the Secure and Fair Enforcement (SAFE) Banking Act and address the IRS Section 280E disallowance of business deductions continue to hinder growth and access to capital in the cannabis sector. The inability to access banking services and the prohibition of business deductions or credits adversely affects the profitability of cannabis companies. The House of Representatives Pushes for the SAFE Act: While the House is focusing on cannabis legislation that is most likely to get to President Biden’s desk, the Senate is signaling once again its desire to pass broad comprehensive cannabis reform over the industry focused banking bill. Cannabis and the U.S. Banking Industry Only 6.5% of U.S. banks and 3.5% of Credit Unions service cannabis companies
State & Local Issues
The lack of federal legalization not only continues to prohibit economies of scale in the cannabis industry as cannabis products cannot cross state boundaries, it also creates a jumbled market that varies not only from state to state, but markedly from one municipality to the next. This disordered playing field is unique to cannabis and is causing multi-state-operators (MSO) to pull out of unfriendly markets.


The Black Market
SIXTH, the consequences of the aforementioned political and state and local issues allows the black market to flourish — cash only transactions combined with excessive taxes and regulations that constrain supply and demand. Today, the effect of the cannabis black market is acute in many jurisdictions. Prior to California legalizing medicinal cannabis in 1996, recall that all U.S. cannabis transactions occurred exclusively as part of an illegal black market. In States like California, Oregon, and Colorado a large percentage of cannabis sales originate from non-licensed providers. In California alone, the black market is estimated to approach $8 billion dollars in annual sales, or nearly twice the value of legal sales. In fact, in order to survive today in California, dispensaries must have access to a large base of affluent customers willing to pay double to triple the street value of cannabis in exchange for knowing that their transaction is legal and the product is free of harmful pesticides due to strict testing guidelines. Interestingly, states like Washington and Florida that have implemented cannabis regulations that do not constrain the supply and demand of cannabis, but which operate more closely upon a balanced and unrestrained supply and demand curve do not face such a black market threating its industry.Conclusion
As for the future, expect these six factors to continue influencing the rise or fall of cannabis mergers and acquisitions. Each factor will play out on its own and will affect the calculation differently. What is certain, is that in the long term, the legal cannabis sector will continue to grow monetarily and geographically. In 2018, Canada legalized cannabis at the federal level. Eventually, cannabis will become legal at the federal level in the U.S. When this occurs, most likely cannabis also will become a NAFTA/USMCA commodity as Mexico’s Congress is under orders by its Supreme Court to legalize cannabis at the federal level. The European Union, especially in regard to medicinal cannabis, will probably follow — then, a new period will dawn upon the cannabis industry, where cannabis will be legally and freely traded in the international world markets.
Projected Global Cannabis Market Size 2014-2024

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