In the past few months, some big deals have taken place in the cannabis industry. In December 2020, there was news of a near-$4 billion merger including Canadian pot giants Aphria (APHA) and Tilray (TLRY), which will create the largest cannabis company in the world in terms of revenue. Earlier this month, Jazz Pharmaceuticals (JAZZ 1.97%) also announced it would be acquiring GW Pharmaceuticals (GWPH). And with more states legalizing marijuana and a slightly more pot-friendly presidential administration and U.S. Congress in place, there's tons of excitement in the industry right now.
Is the industry ripe for more mergers and acquisitions (M&As)? Below, I'll take a look at some of the industry's largest deals and whether cannabis investors should expect to see more action this year.
A look back at some of the sector's most notable deals
It's not uncommon for cannabis companies to acquire other businesses. In the U.S. pot market, where pot is illegal at the federal level and can't cross state lines, it has become a necessary form of expansion. One of Curaleaf's largest acquisitions was the purchase of Grassroots last year for $875 million, which increased the number of states it operated in from 18 to 23.
Moves including large publicly traded companies in the cannabis sector or other industries, however, are not as common. That's what makes the Aphria-Tilray merger so unique. The last time there was such a notable deal came when Aurora Cannabis acquired MedReleaf for $2.5 billion in 2018. There's also the Canopy Growth acquisition of Acreage that was initially priced at $3.4 billion -- but that transaction still isn't complete because of the illegality of marijuana in the U.S. Constellation Brands first invested 245 million Canadian dollars in Canopy Growth in 2017 (it has since added another $4 billion). The other notable outsider to dip its toes in the industry is tobacco maker Altria, which invested $1.8 billion in Cronos in 2018.
That's why Jazz Pharmaceuticals' announcement that it would be acquiring GW Pharmaceuticals for a record-breaking $7.2 billion, paying a premium of about 50% for the stock, made headlines It's not often that non-cannabis companies get involved in the industry, and it has got investors excited and wondering about the possibilities.
Are the recent deals a sign of things to come?
In the Canadian cannabis market, large deals simply haven't been the norm. However, the stage could be set for more. Aurora was previously linked to Aphria in talks, and nothing ever came of them. And while Aphria has found a new partner in Tilray, Aurora could still be looking for a company to join forces with. Sundial Growers said in its last earnings release that it would be looking at all possibilities in a "strategic alternative review," and it's another company that might be out on the hunt for deals in order to bolster its business.
Another big announcement looks probable for the Canadian cannabis sector in 2021, especially if companies look to get bigger to compete with Tilray and Aphria for top spot in the market. And deals in the U.S. will continue to take place, as new recreational markets like Arizona and New Jersey will create some exciting opportunities for multistate operators this year.
The bigger question mark, and what will likely get cannabis investors excited, is if companies from other industries get involved in the wheeling and dealing. Jazz is in the pharmaceutical industry, and although GW's marquee product is cannabis-based Epidiolex, it's technically a pharmaceutical company as well. The acquisition is not nearly as risky or groundbreaking of a move as the investments that Altria and Constellations Brands made in the pot sector. The deal does technically give Jazz exposure to the cannabis market, but it's not investing in a bona fide pot producer: The U.S. Food and Drug Administration (FDA) approved Epidiolex in 2018, making GW one of the safer stocks in the cannabis space.
The recent deal involving GW and Jazz could prove to be a one-off situation. Although there is hope that under President Biden, meaningful marijuana reform could take place, until full legalization happens, many big-name companies from other industries are likely to remain on the fence. There are simply too many logistical and legal challenges that would come with expanding into the sector today. And despite shifts in D.C. politics, there's no guarantee that the legality of marijuana will drastically change anytime soon.
What does this mean for investors?
The recent merger including Aphria and Tilray could trigger some moves in Canada. Jazz's acquisition of GW will likely not have the same effect on the industry, as it's technically a pharma deal.
But whether you're looking to buy a cannabis company that could be an attractive acquisition target or just want to make a good investment, you should consider pot stocks that have strong balance sheets and modest valuations that potential acquirers could afford to take a chance on. There isn't a magic formula that will tell you which company will be the next one to be bought, as it'll depend on a variety of factors. But by investing in a decently priced cannabis stock that has good financials, even if a deal doesn't end up happening, you'll still end up boasting a good investment.