When New York last week took its first step towards legalising cannabis, governor Andrew Cuomo praised the state as the “progressive capital of the nation”.
Comments like that are helping marijuana move into the mainstream, with governments and companies contemplating the billions of dollars in revenues they can reap from liberalisation for personal use.
Sensing that the US, where 16 states have legalised recreational marijuana, might be headed for federal legislation under the Biden administration, investors and consumer goods groups are upping their bets on the nascent legal marijuana industry.
Cannabis companies raised nearly $4.3bn in debt and equity in the first quarter of 2021, compared with $1.6bn in the same period last year, according to Viridian, a financial advisory firm that specialises in the sector.
The number of mergers and acquisitions between January and March, at 58, was almost three times higher than in the same period last year, as groups look to gain scale. The flurry of deals comes after Toronto-listed Aphria unveiled a merger with US-listed Canadian rival Tilray in December to create the world’s largest cannabis group by sales, with $685m in combined revenues.
But it is not just producers looking to cash in on the budding industry. British American Tobacco last month took a 20 per cent stake in weed cultivator Organigram for £126m, following earlier investments by sector rivals Altria and Imperial Brands.
David O’Reilly, BAT’s head of scientific research, said that as the tobacco industry was “moving away from cigarettes over time” the sector was a natural one to explore given the “cannabis space is very close to tobacco and nicotine”.
The London-listed maker of Lucky Strike cigarettes is initially focusing on CBD, a cannabinoid that does not leave users feeling stoned and which it hopes consumers will increasingly vape.
Marlboro-producer Altria and Canadian brewers Constellation Brands and Molson Coors, behind beers such as Corona and Carling respectively, were among the first big consumer groups to make forays into cannabis roughly three years ago, when Canada became the world’s first large economy to legalise the drug.
Altria and Constellation have both been forced to write down their investments by hundreds of millions of dollars, having entered the market as cannabis stocks soared on expectations that turned out to be overhyped for Canada, a country with a smaller population than California.
But Constellation chief executive Bill Newlands told the Financial Times the brewer’s early move had given it a “tremendous head start”.
“We felt that cannabis was going to be big in major markets around the world going forward,” Newlands said of the company’s “offensive investment” of more than $4bn in Canadian cannabis group Canopy Growth, which the brewer last year upped to a 39 per cent stake.
Constellation estimates that the illegal market for cannabis in the US is worth roughly $50bn, with Newlands pointing out that “this is not a sector that does not exist, it just hasn’t existed in a legalised fashion”.
Scott Cooper, chief executive of Truss Beverages, the joint venture between Molson and cannabis group Hexo, said that Molson’s initial exploration of the sector had been defensive, as the brewer worried that legalisation of cannabis would eat into demand for beer and other types of light alcohol.
“There is an overlap between cannabis and alcohol occasions, such as relaxation or at smaller social gatherings,” he said. “It became clear that cannabis would emerge as a competitor.”
Global legal marijuana sales exceeded $21bn in 2020, according to cannabis data tracker BDSA. The state of California in November said legalisation had brought in $1.8bn in tax revenues in less than two years while New York also pointed to the tax and job benefits, underlining why pot is on the mind of lawmakers grappling with depleted finances due to the pandemic.
Yet profits remain elusive and the industry faces considerable obstacles. Sales over the internet, for instance, are banned in most markets and cannabis groups in the US struggle to access financial services, as banks are wary of handling money made from something that remains illegal on a federal level.
And while the professionalised sector starts to bloom, a large number of people are held in US prisons for selling or possessing marijuana, with nearly half a million arrests for those offences in 2019, according to the Federal Bureau of Investigation.
But Cooper said that stigma around cannabis use has rapidly unravelled in just a few years: “It’s almost like a different time and world, so much has changed. If you have a conversation with a young person today they cannot contemplate a time when people would go through that inner struggle [about pot].”
Truss’s alcohol-free drinks infused with the cannabinoids CBD and THC are currently only available in Canada, as the group has opted against launching in the US while cannabis remains illegal on federal level.
Still, Massachusetts-based Curaleaf, which until now has been the sector’s biggest retailer of cannabis by sales, is betting that Europe will soon too move towards liberalisation for recreational use. Last month, it agreed a $300m-plus deal for Emmac, one of the region’s largest growers of marijuana, while Mexico passed a sweeping legalisation of marijuana.
As hopes grow for the cannabis market, companies are seeking to shore up their investments. Constellation, Molson and Altria are members of an industry lobby group launched in March that is seeking to influence how the legal cannabis market will be structured and regulated.
“When you have large multinational companies walking into Congress represented by lobbyists, it does make the landscape look different,” said Nick Vita, a former Goldman Sachs banker and co-founder and chief executive of Columbia Care, which operates more than 100 cannabis facilities across the US, including cultivation sites and dispensaries.
“I think 2021 is the year that cannabis really moves into normal conversations,” said Vita.