US Marijuana Market Warms Up to Merger Deals: ETFs in Focus

Sanghamitra Saha

Canada became the first major world economy and the second country after Uruguay to legalize recreational marijuana last October. The legalization seems to be largely priced-in at the current level. Investors’ interest has been turning toward the United States where the industry is still booming, way far to mature (read: Tilray’s Deal to Buy Hemp Food Maker Bolsters Marijuana ETF).

Cannabis is getting official approval from many U.S. states for recreational uses, in addition to medical usage. Though pot remains entirely illegal at the federal level, Michigan approved a ballot measure during the midterm elections for recreational use of marijuana to become the 10th state, while Missouri and Utah approved the legalization of medical marijuana. The total number of U.S. states greenlighting medical pot is now 33.

As an evidence of strong demand in the United States, pot companies have engaged in deals of late. Harvest Health & Recreation Inc. is acquiring closely held Chicago-based Verano Verano Holdings LLC for about $850 million in the largest U.S. pot deal, as reported by Bloomberg.

Inside Harvest-Verano Deal

Per the company, the joint entity will have licenses to operate up to 200 facilities in 16 states and territories, including 123 retail dispensaries. The will make it one of the largest multi-state operators in the United States. The deal would allow Harvest to have more than 70 operating dispensaries, 13 cultivation facilities and 13 manufacturing facilities by the end of 2019.

Verano’s strong retail brand offers 150 products that are sold in 150 retail locations, according to analysts at Cannacord Genuity. “Arizona-based Harvest will give Verano shareholders a combination of subordinate and multiple voting shares for a total estimated purchase price of $850 million based on a share price of C$8.79,” per Bloomberg. The deal is expected to be clinched in the first half of this year.

If completed, the acquisition will mark the largest deal between two U.S.-focused pot companies, according to data compiled by Bloomberg. Notably, Harvest is the third-largest U.S. cannabis firm.

“Land Grab” to Drive Marijuana Merger and Acquisitions in U.S.

These are not the first U.S. companies that are engaging in an M&A deal. In November, California-based cannabis retailer and producer MedMen had agreed to buy Chicago-based PharmaCann, a medical marijuana company, for $682 million (read: Why Marijuana ETFs & Stocks Have More Room to Run).

The idea is to grab land fast and have licenses to cultivate cannabis. Aurora Cannabis did the same thing in Canada by making several acquisitions in a short span.

Chicago: A Key U.S. State for Marijuana Business?

Chicago’s marijuana industry is booming. Since 2013, medical marijuana has been legal in the state Illinois. There are currently 17 companies that own licenses to grow and process the plant in Illinois, perChicago Tribune.

In November, J.B. Pritzker, who is in favor of legalizing recreational marijuana, was elected governor of Illinois. Canaccord analysts in November commented that Illinois “has the potential to be a meaningful rec market in the not-so-distant future.”

A study carried out by Colorado cannabis consulting firm Freedman & Koski, indicates that Illinois’ annual marijuana market could be between $1.69 billion and $2.58 billion. Overall, U.S. consumer spending on legal cannabis is expected to reach $22.2 billion by 2022, while Canadian spending is estimated to hit $5.9 billion, per a January report by Arcview Market Research and BDS Analytics (read: 4 Reasons Why Marijuana Stocks & ETFs Could Be on a High in 2019).

ETFs in Focus

ETFMG Alternative Harvest ETF MJ is the pureplay fund in the space. The fund is enjoying high momentum now. The underlying Prime Alternative Harvest Index enables investors to take advantage of both event-driven news and long-term trends in the cannabis industry as well as the industries likely to be influenced by the medicinal and recreational cannabis legalization initiatives taking place in many locations globally. The fund is up 45.6% in the year-to-date frame (as of Mar 11, 2019).

Apart from pure-play MJ, investors can tap this growth via AdvisorShares Vice ETF ACT. Cannabis-related products occupy 25% of ACT, while alcohol with cannabis exposure has 5% and tobacco with cannabis exposure has received 12% focus. The fund is up 18.1% this year.


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