It's truly incredible how far the marijuana industry has come in such a short amount of time. Just 24 years ago, Gallup polled adults in the U.S. and found that just 25% favored legalizing pot nationally. There were also no states that had legalized medical or recreational weed, and not a single country worldwide legally allowed adult-use cannabis.
Fast-forward to 2019, where now two out of three Americans in Gallup's annual poll want to see marijuana legalized. What's more, two-thirds of all states have given the green light to medical pot, with 10 allowing adult consumption. To our north, Canada has become the first industrialized country in the world, and second overall behind Uruguay, to legalize recreational weed. That's one heck of an about-face in less than a quarter of a century.
With the cannabis industry now considered a legitimate business model, it's moving on to the next logical phase of its development. Namely, consolidation.
A major U.S.-targeted cannabis deal has closed
To put things mildly, there are way too many marijuana companies in Canada and recreationally legal U.S. states, and they all can't be winners. A large number of competitors means the possibility of grower overproduction, leading to long-term oversupply. We could also see aggressive pricing practices that could eventually weigh on operating margins. While competition is going to be a good thing for the consumer, we as investors would like to see a reasonable level of competition, rather than companies that rush the gates, so to speak, for cultivation and retail licenses.
As we move headlong into 2019, we're liable to see this consolidation in North America taking shape. This past week, the largest U.S.-focused marijuana deal to date officially closed, and it had vertically integrated dispensary iAnthus Capital Holdings (NASDAQOTH:ITHUF) acquiring MPX Bioceutical (NASDAQOTH:MPXEF).
When the deal was announced in mid-October, it gave holders of MPX Bioceutical 0.1673 common shares of iAnthus for each MPX share held, valuing the acquisition at just over $630 million. Each MPX shareholder is also receiving one common share of the newly formed MPX International Corporation, which will hold all of the non-U.S. cannabis businesses of MPX.
Technically, the MedMen Enterprises deal to purchase privately held PharmaCann is larger at $682 million, but this deal won't be completed for many more months. This makes, for now, the iAnthus acquisition the largest U.S.-focused deal in history to have actually been completed.
Here's why iAnthus ponied up big bucks for MPX Bioceutical
The deal itself targets a push by vertically integrated dispensaries to enter new states as quickly as possible. Not only is it costly and time-consuming to open dispensaries, but there are also the added costs of developing grow farms and/or processing facilities to control every aspect of the marijuana supply chain. Remember, weed is still a Schedule I substance in the United States, meaning interstate transport isn't allowed. That means dispensaries that want to internalize their costs and control product quality must be willing to also operate grow farms in the states where they're conducting business.
In addition, applying for cultivation licenses, processing licenses, and retail permits can be costly and take time. If vertically integrated dispensaries like iAnthus can speed up this process by acquiring these licenses and permits, all the better.
Following closure of the deal, the company now has its footprint in 11 states, with 19 open dispensaries. However, the combination with MPX lifts iAnthus' dispensary license count to 63, providing an ample runway to expand its retail presence. According to iAnthus, the combined company has 210,000 square feet of licensed grow space but is targeting 600,000 square feet. This near-tripling in capacity matches up well with the more than tripling in store count expected in the years to come. Said CEO Hadley Ford:
With iAnthus' operation increasing in size from six to 11 states, we plan to take advantage of this opportunity by unveiling unified national retail and product brands across the organization. We realize that as the cannabis market continues to grow, the need for strong national brands only increases. With our ambitions to be the leader in the U.S. cannabis market, that is our logical next step.
Which dispensary is next?
With real consolidation under way in the vertically integrated dispensary space, the big question has to be, "Which company is next?" While this remains nothing more than an exercise in dart-throwing, one possible target is Trulieve Cannabis (NASDAQOTH:TCNNF).
Arguably the biggest obstacle to consolidation is valuation. Currently sporting a $1.3 billion market cap, Trulieve Cannabis would appear to look more like a buyer than a company to be acquired. In fact, Trulieve did recently acquire two businesses, one in California and one in Massachusetts, that'll allow it to expand into these recreationally legal states.
But Trulieve also has a dangling carrot that pretty much any dispensary would love to get its hands on: its laser focus on the Florida medical marijuana market. Trulieve has 24 open dispensaries in the nation's third most populous state -- a state, mind you, that's home to a lot of retirees who are more likely than younger people to have ailments that could be treated with cannabis products.
Trulieve also has ample grow farms within the state and is able to put more than 125 company-branded products in its dispensaries. It's worth noting that Florida has awarded cultivation licenses to just over one dozen companies, making the market especially exclusive, and therefore attractive to a potential acquirer.
Once again, I'm no fortune-teller. But if consolidation is to continue as expected in the U.S., Trulieve Cannabis could potentially find itself as the next prime target.
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