In March 2021, on the back of a record 2020, the Colorado cannabis industry crossed a massive benchmark: $10 billion in sales since recreational marijuana businesses started operating in 2014.
This has shown no signs of slowing down. The state has since passed $11 billion in sales. With more than $1.1 billion in marijuana sales through June, the most recent month for which data exists, 2021 is set to eclipse 2020 as the most lucrative year on record for cannabis.
While marijuana sales in Colorado continue to climb ever higher, more states are legalizing recreational cannabis. After two states did so in 2020, six have so far in 2021. Recreational marijuana is now legal in 21 states and U.S. territories. Cannabis industry professionals speak of federal legalization or descheduling as an inevitability.
All of that has led to a flurry of mergers and acquisitions in the cannabis space.
“What I see in cannabis in particular is folks see the writing on the wall that essentially, it will be federally legalized or decriminalized in the near future,” said Rachel Gillette, a partner at the Denver law firm Holland & Hart who specializes in cannabis business law. “I think a lot of companies are seeing the possibilities of that, and that is creating a lot of mergers and acquisitions activity.”
All of this means that the cannabis industry in Colorado and around the nation is hotter than it has ever been. More capital and more businesses are entering the space than ever before. Over the past few years, the marijuana industry in Colorado has seen an increasing trend of consolidation, mergers and acquisitions. This is taking many forms: local companies acquiring other local and out-of-state companies in an effort to expand, as well as companies from other states and countries purchasing local marijuana businesses to get in on the Colorado market.
“You have companies in Colorado, what we call ‘homegrown’ companies, that are expanding via acquisition, and then you have large multistate operators who want to establish a footprint here and enter one of the larger and most mature cannabis markets in the U.S.,” said Truman Bradley, executive director of the Marijuana Industry Group, a trade association for the industry in Colorado.
Whatever the form, the cannabis industry is in the middle of a massive transformation.
“We are seeing major consolidation by the big players,” said Aaron Shaw, associate partner with the Denver brokerage Cannabis Capital Advisors. “They are buying anything and everything. There has been a major shift in the market. My phone has never been busier. I’m seeing more stores open to selling now and seeing crazy high sales prices come down. I have more stores that I’m selling now than I have in maybe two or three years.”
Denver company Schwazze has been one of the most aggressive players. In December 2020, it purchased for $118 million the dispensary chain Star Buds, including its locations in Louisville, Niwot and Longmont. It followed that up with the June acquisition of the Boulder-based dispensary chain Drift for $3.5 million.
Schwazze wasn’t done there. In July, it acquired for $11.3 million a 34-acre grow op in southern Colorado. In August, it paid $6.7 million for a Denver-based indoor cannabis cultivation company. This string of transactions left Schwazze vertically integrated with 19 dispensaries in Colorado.
“It’s just easier to operate a cannabis business when you’re vertically integrated,” said Andrew Comer, a partner at Denver law firm Fortis Law Partners, who specializes in cannabis law. “What you’re seeing as companies try to do that is just a maturation of the business.”
Other cannabis businesses have both made acquisitions and been acquired. Green Dragon Cannabis Co., a Denver-based chain with 15 stores, first expanded into the Boulder market in 2020 when it purchased Boulder Botanics. Then, in August, Green Dragon was acquired by Eaze, a California-based marijuana delivery platform that hopes to expand the Green Dragon brand in Florida and Michigan.
Boulder-based CBD producer Charlotte’s Web Holdings Inc. began to break into the THC space in March with its $8 million acquisition of Stanley Brothers USA, a company that makes products with THC levels too high to qualify as legal hemp but lower than what is found in most recreational marijuana.
It’s not just companies that create cannabis products that are getting in on the action. Lafayette-based urban-gro Inc., which engineers indoor agricultural systems for growing cannabis and food, paid $9 million in June for the cannabis architecture firm MJ12 Design Studio, making it the first integrated architecture, engineering and cultivation company in the marijuana space. That came on the heels of its February initial public offering in which urban-gro raised $62.1 million.
“We want to be able to offer a turnkey facility where a client brings their marijuana license and zoned property, and we deliver a fully operational high-performance facility,” said Bradley Nattrass, CEO of urban-gro. “To do that, we needed to make some smart acquisitions to fill in some holes, the first of which was MJ12.”
International companies are also trying to break into the Colorado cannabis market. Interest is especially strong from Canada. In May, Canadian packaged cannabis goods company Hexo Corp. purchased a production facility in Fort Collins, its first facility in the U.S. And in August, Canadian greenhouse produce grower Village Farms International acquired for $75 million the Denver CBD company Balanced Health Botanicals.
“Industry consolidation is definitely happening, especially in mature markets such as Colorado,” Bradley said.
Why is it happening now? The answer is multifaceted and complex. However, the inciting incident for this wave of consolidation, mergers and acquisitions was Colorado House Bill 1090, which was signed into law in May 2019. That had a twofold effect: It allowed people who live outside of Colorado to own cannabis businesses in the state, and it permitted publicly traded companies and private capital funds to invest in Colorado marijuana businesses.
“That made it possible for Colorado entrepreneurs to grow their own businesses or profit from their hard work via a sale,” Bradley said. “Before then, access to capital was very, very limited. That paved the way for local expansion as well as cashing out. It allowed Colorado companies to stay at the top. I think the state legislature understood the challenge that Colorado cannabis businesses were facing because they were so hamstrung by a lack of capital.”
Colorado also benefits from what Bradley calls the maturity of the market — it was the first state to sell recreational cannabis, giving it a built-in advantage. Chris Woods, founder of the Boulder-based dispensary Terrapin Care Station, gave an idea of how challenging it can be to establish a marijuana business in a new market.
Terrapin has expanded to new markets in places such as Missouri, Pennsylvania and Michigan, states that don’t have the regulatory environment, business infrastructure or support industries that have become established in Colorado.
“In new markets, their regulatory bodies are still figuring out how to operate,” Woods said. “A lot of the ancillary companies like testing and transportation have not yet been established. Our regulators are learning the business as we bring it up. Every state has different regulations. When you come into a new medical market, it’s about building your patient base from nothing. Just getting doctors to prescribe it is a big thing. We’re building up these marketplaces as opposed to coming in and buying them.”
Colorado’s regulatory environment also helps make its marijuana market more attractive than other states. Woods said its tight financial regulations can help make businesses in the state feel like safer investments. And some states that have legalized recreational cannabis, such as New York, New Jersey and Florida, also placed tight limits on how many dispensary licenses they give out. Colorado has not done that.
“In other states, you have these big companies that own huge swathes of the market in those spaces, but in Colorado you can succeed as a small business,” Gillette said. “We have more of a free-market, competitive marketplace.”
And sometimes selling is the best way for a marijuana entrepreneur to capitalize on their hard work. Despite the fact that cannabis businesses in Colorado are doing record revenue, that alone is not always enough for them to become profitable. Marijuana sales is a high-overhead industry. It is also very difficult to scale a cannabis business efficiently, a lesson that some businesses that have been acquired learned the hard way. Retailers could have high revenue but still not be making any money, Shaw said.
That’s one reason why so few of these marijuana consolidations, mergers and acquisitions are cash-only transactions, Woods said. Many of them end up being a mix of cash, stock and debt sales. Indeed, Schwazze’s acquisitions of Star Buds and Drift were part-cash, part-stock.
Do the effects of all these transactions filter down to the average cannabis consumer? Woods said they can. One issue, he said, is that after an acquisition, a company will completely clean house and bring in all-new staff.
“When these transactions happen, they gut all institutional knowledge from these businesses from growers to business development to front-end staff,” Woods said. “When that happens you lose all that momentum that company had from developing its brand and products. The customer is ultimately going to pay more. The consumer feels that.”
That is part of the reason why Terrapin follows a more deliberate approach to expansion, starting independent and buying real estate in emerging markets to build its stores from the ground up rather than acquiring existing dispensaries.
Those concerns also informed urban-gro’s decision to first become a profitable company and go public. Nattrass said the company made a concerted effort to become profitable in 2019 when the Colorado cannabis market started to mature. Going public, first through over-the-counter markets, then on the NASDAQ, gave urban-gro access to the capital it needed to begin this drive of vertical integration.
“Raising the appropriate funds to do that on your own would be hard,” Nattrass said. “That’s exactly why we decided to go public. We couldn’t go to a bank for capital. My credit cards were canceled. I knew we had to up our game. If we were going to differentiate ourselves, we had to be profitable.”
Nattrass said he hopes that MJ12 will be the first of many acquisitions of “service-focused, synergistic, profitable companies” that enable urban-gro to control every aspect of the creation of their agricultural engineering systems. That will include companies that do project management and help businesses obtain licenses. Nattrass also said that urban-gro wants to acquire more architecture and engineering firms in different regions of the world so it can continue to expand globally.
There are two facets to that. The first is indoor vertical food farming, a sector that urban-gro is beginning to enter because it uses the same equipment, architecture and engineering that growing cannabis does.
The second is the nascent European marijuana market, which Nattrass compared to the U.S. market five years ago. An April study by the London cannabis data company Prohibition Partners predicted that the European industry, which is worth about $400 million right now, will grow to $3.2 billion by 2025. Urban-gro is already entering the market.
“What we’re finding is there is a tremendous demand for everything we’re doing, for our solutions and equipment, because they don’t exist in Europe right now,” Nattrass said.
What’s clear is that through organic growth, consolidation, mergers and acquisitions, the marijuana market in Colorado and abroad is not slowing down.
“The industry in Colorado is very mature from a market perspective and a company development perspective,” Bradley said. “The acquiring companies know with more certainty what they’re buying compared to other states that legalized weed later than Colorado. Revenues are up across all segments. With each passing day, the outright legalization of cannabis nationwide becomes more of a reality. This means acquiring a Colorado company is a safer bet.”
