M&A Sector Spotlight: Cannabis
M&A activity in the cannabis sector continues to lag behind the exuberant dealmaking of the early 2020s, but selective opportunities still exist. Instead of broad-based expansion or aggressive capital raising, the market is increasingly segmented between consolidation among more successful operators and opportunistic acquisitions of distressed or underperforming operators. On the one hand, well-capitalized firms are targeting operationally sound assets in cultivation, retail, and branded products, focused on those in markets where regulatory conditions provide a path to sustainable growth. On the other, receiverships are more common, often resulting in non-bank lenders taking control of borrowers, and regional banks that had begun providing commercial lending are retreating.
At the same time, sector headwinds persist. Wholesale price volatility, patchwork state regulations, and continued margin compression are reinforcing a fundamentals-first approach. In particular, hemp-derived products—most notably beverages—have become both a focal point of opportunity and a source of uncertainty. The explosive consumer interest in hemp-based drinks is drawing new entrants and capital, but uneven enforcement, varying and rapidly changing state rules, and questions over FDA regulation are complicating valuations across the entire industry and slowing deal execution. This dynamic is reshaping the market: some investors see a first-mover advantage, while others are pausing until greater clarity emerges. The market is further complicated by industry participants taking an “uncertain tax position” and not following Section 280E of the Internal Revenue Code, adding another risk complication to deals.
Regulatory developments at the federal level remain a wildcard. The Trump Administration’s consideration of moving marijuana from Schedule I to Schedule III under the Controlled Substances Act has captured headlines, but the potential impact is far more nuanced than early commentary suggests. Rescheduling would relieve operators of the burdens of IRS Section 280E, thus improving cash flow and profitability, and would also likely lead to greater access to traditional banking and capital markets. Nevertheless, rescheduling would leave many challenges unresolved and present entirely new questions around federal-state regulatory alignment. For dealmakers, these unresolved issues temper enthusiasm and reinforce a cautious, case-by-case M&A strategy.
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“We’re finally seeing investors recognize that counting on federal action, such as closure of the ‘hemp loophole’ or rescheduling, is not a basis for enthusiasm. Our most recent transactions have involved strategic entry into specific market segments (for example, testing), combinations of well-managed operators, and equity holders exiting the space. It’s bumpy out there!”R. Lance Boldrey |
