Wednesday, June 10th, 2020
Lucrative as it may seem, the Cannabis Industry still carries (with it) some hidden risks that not many newbie investors and entrepreneurs may never see or perceive.
We know the legalization agenda has been spreading like bushfire. And one by one, countries and states (within countries) have been changing regulations to favor Marijuana, but that’s only one side of the coin.
On the flip side, investors and retailers with cannabis merchant accounts are dealing with significant challenges that may never cross your mind unless you spend quality time studying the sector.
For instance, headlines of Mergers and Acquisitions in the cannabis industry dominated the internet two, three years back when the industry was flourishing. But today, many big players are backing off from deals.
Last year wasn’t all smooth sailing for the sector, and we can’t speak better of it this year.
As it stands, many companies have been facing challenges, so investors must proceed with caution.
Fewer Mergers and Acquisitions
Two years ago, when the cannabis sector was thriving, companies were crazy about mergers & acquisitions.
Giants like Aurora Cannabis swallowed many of its competitors like CanniMed Therapeutics and MedReleaf Corp. At some point, it even entered partnered with world-known soft-drink and beverage maker Coca-Cola.
But of late, we’ve seen fewer and fewer M&As. Even worse, cannabis firms have been turning down deals and moving away from existing ones.
For the marijuana industry, the troublesome 2020 kicked off with many broken deals;
- Cresco Labs backed off from a $282.5 million acquisition of Tryke.
- Harvest Health & Recreation drew back from plans to buy Verano Holdings for $850 million.
- Planet 13 backed off from a $10 million deal that would have seen it set foot in California.
All these are signs that firms and investors don’t have adequate cash or aren’t willing to put their money in the sector.
Other concerns are that;
- Growth is not given: Earlier, generating revenue growth wasn’t a concern for firms in this sector. But that’s not the case today. OrganiGram Holdings, for instance, announced a 14 percent dip in sales compared to 2019 results (from CA$26.9 to CA$23.2 million).
- Rumors of firms running out of liquidity; Ello Capital, an Investment bank, predicted in Feb that companies like Aurora only have months of liquidity.
- Profits for cannabis companies are inconsistent and are often backed by non-operating items.
From an investor’s point of view, these four concerns are red flags that the industry is not as lucrative as before.
So what next?
But today’s insights don’t mean the future is dull for a promising sector like Marijuana. It only means investors should wait. Who knows what tomorrow holds?
Topics discussed in this article:
- Cannabis Industry
- Cannabis Merchant Account
- Inversions