Consolidation of the cannabis industry is inevitable as the market matures.

Heading into 2022, numerous forecasts predicted another flurry of M&A activity after an energized 2021. With nearly three months of the year complete, opinions are split on M&A activity so far.

M&A In 2022 Is On Fire

In one camp, sources say that M&A is right on track with forecasts calling for another year of consolidation.

Matt Hawkins, a managing partner at Entourage Effect Capital, said significant M&A deals appear on the single-state and national levels.

Hawkins cited various examples, including Cresco Labs Inc (OTC:CRLBF) recently announced plans to acquire Columbia Care Inc (OTC:CCHWF) for $2.1 billion. He also noted Harborside Inc (OTC:HBORF) deals to acquire Urbn Leaf and Loudpack to form StateHouse Holdings.

"It's evident that M&A is driving industry growth for the foreseeable future," Hawkins said.

Julie Herzog, a partner at Fortis Law Partners, agreed "in the sense that we're continuing to see major players focused on ensuring they remain number one through mergers and acquisitions."

She said smaller companies are trying to stand out as attractive acquisitions by becoming regional or product categories leaders.

Going back to October 2021, Herzog cites Canopy Growth Corp's (NASDAQ:CGC) $300 million purchase of Wana Brands, pending THC legalization in the US, as an example of things to come.

"I expect to continue to see many similarly structured deals and am encouraging my clients to begin preparing their companies for potential M&A now before federal legalization happens," Herzog said.

David Farris, VP of sales and marketing for Planet 13 Holdings Inc (OTC:PLNHF), sees specific states becoming attractive M&A targets.

"I definitely see emerging markets such as Florida as a major opportunity for cannabis industry growth," Farris.

Planet 13 announced plans to enter the state through a $55 million Harvest Health & Recreation subsidiary purchase in September 2021. In March 2022, the company announced the Jacksonville suburb of Orange Park as its first Florida dispensary location.

M&A Slower Than Some Had Anticipated

Cresco's latest news further suggests that larger-scale deals are happening in 2022. Still, several sources feel the year's M&A activity has been slower than expected.

Morgan Paxha, co-founder and managing director of Poseidon Asset Management said muted market activity isn't a surprise due to macro-level risks and a busy 2021. His firm forecasts that 2022 will see smaller deals financed with cash, seller's notes and minor equity issuance.

Still, a more substantial or higher frequency of deals isn't out of the picture.

"We believe larger events will resume as risk appetite returns as that will be more impactful to the acquirer's fundamentals," Paxhia said.

Sweet Leaf Madison Capital CFO Andrew J. Kaye said both opportunity and currency are in short supply for the near term. He cited an M&A "hangover" of sorts.

"Hangover from Croptober, dislocation from COVID, and competition from the legacy market due to high taxes have all contributed to sluggish sales," he said.

Down for the moment, Kaye does not see the current sales dip having a lasting impact on M&A deals.

George Mancheril, CEO and founder of Bespoke Financial cited macroeconomic concerns and geopolitical turmoil as primary factors in a slow 2022.

"This has obviously had an effect on our industry and led to less M&A transactions than may have initially been forecasted," said Mancheril.

Still, he notes that the Cresco-Columbia Care deal does indicate that significant activity will still occur.

Q1 Reports Will Play A Critical Role

Many in the market are readying themselves for M&A to tick up in the latter stages of 2022. In the meantime, John Kagia, chief knowledge officer for New Frontier Data said that eyes and ears remain glued to Q1 2022 sales revenue reports.

He reported that cannabis seasonality trends have shown sales declining between October and February in past years. Kagia added that high inflation rates, supply chain disruptions and rising consumer prices may have played possible roles in market activity.

"We know that cannabis is highly recession resilient, but facing tightening finances, consumer efforts at cost savings may negatively impact legal operator revenue over the coming months," Kagia said.

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