M&A And Monopolies In The Marijuana Industry: Here's What You Need To Know

This article is written by Tia Moskalenko from AskGrowers

The legal cannabis market in the United States is pretty young, but many experts agree it is an industry with a very bright future. It keeps evolving and growing at an incredibly fast pace, and it seems the trend won’t stop, at least not anytime soon, as more states legalize marijuana use. Plus, the sector is the source of enormous profit. With that said, seeing many big players and highly regulated industries interested in the cannabis sector does not come as a surprise.

Lately, one of the actual topics around the marijuana industry is the creation of monopolies. The fact the topic keeps popping out seems justified, at least to a certain degree.

 Merges, acquisitions, and start of monopolies in the marijuana industry

 Cannabis companies are highly active in developing new products to attract a larger audience. In addition, the entire market is extremely fragmented. The manufacturers do not have permission to ship their products beyond the state borders. For that reason, consolidation that comes through acquisitions and merges was something many predicted. Many companies in the US focus on obtaining licenses for the production and trade of various weed products, including edibles, as many consumers prefer them.

In the past, the pharmaceutical industry lobbied for pot legalization to be stopped. On the other hand, some companies from the pharmaceutical sector did the opposite thing. They’ve decided to start partnerships with weed companies to develop various medicinal marijuana-based products. Other industries, including tobacco and alcohol, are looking into options that would allow them to get into the pot market in the areas where recreational use of cannabis is legalized.

There have been many mergers and acquisitions in the marijuana market, including Pharmacann and MedMen MMNFF, iAnthus ITHUF, and MPX MPX. But that’s just a fraction of happenings. In a deal worth $213 million, Cresco Labs CRLBF acquired Bluma Wellness. Ayr Strategies CNBQF acquired Liberty Health Sciences, and Verano VRNOF, a multistate operator, purchased Alternative Medical Enterprises (AltMed).

One of the world’s largest cannabis companies, Canopy Growth CGC, agreed to acquire Acreage Holdings ACRHF when (and if) the United States legalizes cannabis on the federal level. The price was set at $3.4 billion. That was the initial deal, but Canopy Growth revised it and will now pay $843 million (based on stock prices when the announcement was made) to acquire 70 % of Acreage Holdings.

In July 2020, Acreage Holdings, a national marijuana operator, agreed to pay $250,000 to The Cannabis Control Commission of Massachusetts to resolve charges that it had tried to control more marijuana dispensaries than allowed by law. In January 2020, the commission warned Acreage, which has John Boehner, the former US House Speaker on the board, that management services contracts with Health Circle and Patience Centric of Martha’s Vineyard give the company lots of leverage over smaller firms. Through the directly owned Botanist subsidiary, Acreage already operates three dispensaries in the state. The deals could lead to a situation where the conglomerate would have controlled five and even more cannabis dispensaries. The maximum is set to three. 

Acreage Holdings asked the Control Commission of Massachusetts to process the license application, but the commission refused to approve them. The report determined the company should have known the deals in question were impermissible.

“When I see a company not being forthright and disclosing a controlling relationship, particularly when it’s the exact scenario described in our regulations, that is a problem,” Commissioner Shaleen Title said.

The commission chairman Steve Hoffman told reports that Acreage Holdings deliberately went ahead, even though the Control Commission warned them they were going towards violation. Hence, the decision represented the clear cut for the commission.

“We want to express our thanks to the CCC for their professional approach as we worked through today’s resolution,” James Doherty, Acreage general counsel, said in a statement. “We’re looking forward to focusing all our energies on what we do best, which is deliver great products to the citizens of Massachusetts.”

A year earlier, in 2019, Acreage Holdings paid another fine. The amount was different - $300,000, and so was the state – Ohio. In Ohio, a holder of a medical cannabis dispensary license cannot sell the owned license until the dispensary has been in business for at least a year. The Acreage was planning to enter into an agreement with a marijuana dispensary during its first years of operation.

The monopolies have become a part of the marijuana industry. Many big players taking the smaller ones. In addition, some states allow vertical integration, which means that one company or set of a few owners operate not just the production part, but everything else, including wholesale and retail. Many people in the industry are worried about all the acquisitions and mergers as they lead to monopolies. Such actions also lead to lower-quality products. The money no longer goes into the hands of local communities. Instead, it goes right into the hands of big corporations and MSOs.

Multistate operators represent the concentration of power. Logically, such operators have a significant advantage over small businesses that operate locally. The dominance of big players can be observed as the result of current state regulation. In other words, state regulators need to take the steps and work towards creating certain restrictions so the small businesses get the chance to compete with MSOs. 

Are Monopolies Legal?

In the United States, antitrust laws are focused on the promotion of fair competition on the market. The main goal is to protect the consumers and competitors from any business practices that are considered anti-competitive.

Monopolies are legal when the company plays by the rules and operates fairly. On the other hand, antitrust laws forbid any form of wrongful acquisition or monopoly power preservation. They also prohibit the abuse of the monopoly power to establish a new monopoly.

In 2020, Attorney General William Barr ordered investigations into the 2019 marijuana company mergers. John Elias, the Justice Department spokesman, said that Attorney General improperly went after marijuana suppliers and that the call was based on his personal views about the industry. The review of the cannabis mergers orchestrated by William Bar was politically motivated. The merges have not been viewed as anticompetitive.

Wrapping It Up:

The cannabis market keeps growing and moving further even though it still is federally illegal. One of the actual topics about the marijuana industry is the creation of monopolies and the fact multistate companies have a huge advantage over small businesses. Experts believe there will be even more acquisitions and mergers in the industry.

The competition won't bloom without being able to enter the marijuana market or being able to compete with the big players.  Those who cannot survive will disappear, and those with lots of money will force businesses with empty pockets to exit the scene.

When the number of players on the market isn't high, the lack of competition will lead to higher prices. For that reason, certain restrictions should be designed and implemented. It would allow smaller businesses to compete with other players on the market, no matter how big they are. Such moves would lead to healthy competition, and it would market growth. Hopefully, the state regulators will create restrictions and programs that would remove the existing barriers.