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Pot M&A Boom Awaits, inCalifornia and Beyond:Cannabis WeeklyTiffany Kary, Bloomberg News

DALY CITY, CA - APRIL 18: A bowl of medicinal marijuana is displayed in a booth atThe International Cannabis and Hemp Expo April 18, 2010 at the Cow Palace in DalyCity, California. The two day Cannabis and Hemp Expo features speakers, retailersselling medical marijuana smoking paraphernalia and a special tent available formedical marijuana card holders to smoke their medicine. Voters in California willconsider a measure on the November general election ballot that could make the

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consider a measure on the November general election ballot that could make theState the first in the nation to legalize the growing of a limited amount of marijuana forprivate use. (Photo by Justin Sullivan/Getty Images) Photographer: JustinSullivan/Getty Images North America , Photographer: Justin Sullivan/Getty ImagesNorth America

(Bloomberg) -- Jazz Pharmaceuticals Plc’s $7.2 billionpurchase of GW Pharmaceuticals Plc this past week is thebiggest tie-up yet for the cannabis industry. And it’s likelyjust the beginning.

The blockbuster deal, which dwarfs Tilray Inc. and AphriaInc.’s $3.8 billion-valued merger as well as ConstellationBrands Inc.’s multibillion-dollar investment in CanopyGrowth Corp., shows the growing interest inpharmaceutical-grade cannabinoids. With big moneyflowing into this market and the broader industry, it alsoportends more megadeals ahead.

“Capital is back in the cannabis sector,” Bill Doran, apartner in Benesch’s Chicago office specializing in mergersand acquisitions, told me last week.

After a financial drought for even some of the biggestmultistate players, activity is heating up just as the marchtoward U.S. legalization -- at both the state and federallevels -- picks up pace, creating a perfect environment foran M&A boom. The big question now is where those dealsare likely to happen.

Doran predicts California will be a key. Despite beingdifficult to evaluate because of the persistence of the blackmarket, there are a lot of small, promising brands with loyalfollowings.

“Multistate operators that aren’t there already will set theirsights on California,” he said. “It’s by far the biggest marketin the country, and it eclipses the entire Canadian marketfrom a demand perspective.”

States that have medical markets but haven’t yet legalizedrecreational use will also continue to attract companies thatwant to get in before the legal change, he said, citingCresco Labs’ recent $213 million deal with Bluma Wellnessto move into Florida.

Investors will also look to ancillary technologies thatsupport the industry, such as logistics companies and e-commerce specialists. Think Uber-Drizly’s alcohol-deliverydeal, but for cannabis. Again, California is a ripe geographyfor acquisitions, because cannabis has been legal forlonger there, giving it a more developed market.

While there are hundreds of smaller players that may beeager to pair off, economics favor companies with morescale, said Matt Hawkins, managing partner of private

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g g p pequity firm Entourage Effect Capital.

“Companies that are larger and can move quickly to sell toinstitutional capital or large CPG, alcohol, pharmaceutical,nutraceutical and tobacco companies are going to be theones the market rewards first,” Hawkins predicted. His firmhas deployed more than $150 million in about 66investments in the cannabis industry.

One of the most interesting factors to watch in thisconsolidation is the science. A growing number ofcompanies are pursuing research on the compounds inmarijuana plants and their effects on specific diseases anddisorders.

That was a central factor in the GW-Jazz deal. GW makesan epilepsy medication called Epidiolex, the first drugderived from the cannabis plant to win approval from theU.S. Food and Drug Administration. But it wasn’t just aboutEpidiolex -- it was also about the promise of its late-stagetrials for other cannabis-derived compounds to treat thingslike multiple sclerosis, autism and schizophrenia.

Pharmaceutical companies aren’t the only ones interestedin rare cannabinoids, which can be extracted from plants orsynthesized from labs, and usually come withoutpsychoactive effects. In a recent overview of players in thatspace, ATB Capital Markets analyst David Kideckel pointedout that the market, already worth around $20 billion, isalso attractive to consumer companies.

Cannabinoids are likely to become a “critical” ingredient inpharmaceuticals and consumer goods, he wrote. With thatin mind, the GW deal is a “game changer for the industry.”

COLUMNIST’S NOTE

This newsletter currently publishes Sundays at 10 a.m.New York time. We are considering moving its publicationto Monday mornings before the start of regular trading. Ifyou have any questions or concerns, please contact thecolumnist at: tkary@bloomberg.net

NUMBER OF THE WEEK

QUOTE OF THE WEEK

“This has been a far more stressful time in people’s livesthan normal. People are also looking for more ways athome to entertain themselves, and cannabis was

$2 billion: The estimated boost to U.S. cannabissales in 2020 from prior expectations due to theCovid-19 pandemic, according to BDSA.

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home to entertain themselves, and cannabis wassomething that could fill the gap,” Kelly Nielsen, vicepresident of insights and analytics at BDSA, said in aninterview. The group found a 34% increase in peoplesaying they’re shopping more often for cannabis during thepandemic, generally to deal with stress and anxiety.

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Cannabis stocks got a broad-based boost from theJazz-GW deal.

While U.S. investors are starting blank-check firmsto hunt for deals, including in the cannabis space,Canadians are forming fewer of the so-called SPACs.

A micro-cap Canadian stock, Nabis Holdings Inc.,surged 9,500% before regulators canceled all thetrades.

U.K.-based cannabis company Cellular Goods Plc,which counts soccer star David Beckham among itsinvestors, seeks to list on the London StockExchange.

With New York on the precipice of legalizingrecreational marijuana, a fight is brewing over how tospend what’s expected to be more than $300 millionin tax revenue.

Minnesota Democrats have renewed a push tolegalize recreational cannabis, potentially making itthe 16th state to do so.

A Kansas plan to fund Medicaid with marijuanataxes will be a long shot in the 2021 legislativesession, lawmakers say.

In Montana, conservation, drug treatment andeconomic development are all vying for the state’snew stream of marijuana tax revenue.

Canopy Growth reports third-quarter earningsbefore the market opens.

Aurora Cannabis reports second-quarter earningsafter the market closes.

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