Cannabis producers need to go global in the long-term: Aphria CEO
For Kim Rivers, chief executive officer of Florida-based Trulieve Cannabis Corp., the beginning of the year is usually busy with strategy reviews or fielding calls about the state of the nascent industry. But almost overnight on Jan. 6, as Democrats cemented their hold on both Congress and the White House, interest in her company reached a new high. Suddenly the number of meetings lined up for her January investor conferences doubled, and the calls from investors and analysts skyrocketed.
“Now it’s five people on the phone asking due diligence-type questions,” Rivers says. While racing to keep up with investor relations, she’s also making plans to replace Trulieve’s state operations with regional hubs to manage legal weed’s fast-expanding reach. “There have been a lot of good headlines,” she says. “Now we have to dig into details.”
Georgia’s Jan. 5 election results, which flipped the Senate to Democratic control, have lit a fire under the cannabis industry. The market for legal U.S. product was already forecast to more than double, to US$41.5 billion, by 2025, according to New Frontier Data. Now it’s expected to do even better, with more states legalizing on a faster timeline, and full national decriminalization a distinct possibility.
Many institutional shareholders, who’ve watched for years from the sidelines for fear of reputational damage or legal repercussions, are jumping in. Companies are raising cash and reworking their strategies as the prospects grow that 2021 could be the year some of their regulatory dreams—from gaining access to banking to relief from a crushing federal tax burden—finally come true.
Since California legalized medical marijuana in 1996, there’s been growing state-by-state acceptance of the plant and its derivatives, including hemp and CBD. Canada legalized pot in 2018, creating an industry dominated by companies that have listed on U.S. exchanges, enticing American investors.
Meanwhile, U.S. weed companies have grown into mature “multistate operators,” while working within the confines of tax rates that can approach 70 per cent, little ability to issue bonds or get loans, and a ban on transporting raw flower or finished products across state lines. Unlike Canadian pot businesses, U.S.-based companies that deal directly with marijuana can’t list on U.S. exchanges due to federal law.
Legal concerns have also meant private investors and family offices have traditionally been the main stakeholders, with most keeping a low profile, wary of triggering their own legal issues or advertising that they’ve waded into an investment with so much regulatory risk.
Then came the coronavirus pandemic, in which marijuana dispensaries were declared an essential service by many states. More consumers turned to cannabis and CBD as a balm for anxiety and sleepless nights, or just something new to do. In November, when five states voted to legalize at least some type of marijuana use, the outlook grew even rosier. And with Democrats in control of Congress, there’s hope that legislation such as the States Act (which leaves legalization up to individual states but would likely remove the rule that prohibits weed operations from deducting ordinary business expenses and allow access to capital markets and banking), the SAFE Banking Act (which would more narrowly permit banks to do business with weed operations), and the MORE Act (which would federally decriminalize marijuana) will gain traction.
In the 24 hours after Georgia’s results became clear, Curaleaf Holdings Inc., the largest U.S.-based multistate operator, announced that investors had pumped in more than US$200 million in fresh capital. The investment, one of the biggest capital raises ever for a cannabis company, will help Curaleaf ramp up business in states such as New York, which recently announced a proposal to legalize recreational use, or fund acquisitions.
“With the election in Georgia, we think there will be faster movement in D.C.,” says Boris Jordan, executive chairman of Curaleaf. “We wanted to be prepared to take advantage of that with more capital on our balance sheet.”
In the following days the company also announced a debt deal. As with the share offering, different investors showed up. “They’re all large institutional investors, and major sovereign wealth funds buying in,” Jordan says. “That’s a sea change for 2021. It shows the industry’s maturity—and the acceptance.”
Ben Kovler, CEO of Chicago-based Green Thumb Industries Inc., says the industry’s recent acceleration shouldn’t be all that surprising. “The political changes are not leading indicators, they’re trailing indicators,” he says. “The American consumer wants the product. They’ve wanted it for over a decade.” Green Thumb is considering refinancing its debt if it gets access to capital markets, which will reduce its cost of capital and allow it to invest more money back into the business. It also plans to increase its head count, on top of the 1,300 jobs it added in 2020.
Lobbyists for the industry are eager to capitalize on the new momentum. “After Georgia, everything is now possible,” says Erik Huey of Platinum Advisors, a lobbying firm that works with Canada’s Canopy Growth, which has a pending merger deal with U.S.-based Acreage Holdings that will be triggered if federal legalization occurs. He’s working to form a political action committee that will court Republican politicians’ support for marijuana-friendly legislation. “There’s an opportunity to light up a demographic in the way that soccer moms or Nascar dads were a key demographic,” Huey says. “The message is: You don’t want to run afoul of the cannabis voter. They live all over. They are Republican, libertarian, and Democrat. And if you’re on the wrong side of this issue, it’s no longer a free pass.”
Bill Miller, a money manager known for putting money early into Amazon.com Inc., is among a new breed of investors coming out about their holdings. On Jan. 7 he disclosed that his Miller Value Partners is an investor in Green Thumb and predicted that cannabis bans will go the way of alcohol prohibition a century ago. “It’s one of those things where, just like gambling back in the old days, the states are dying for money,” he said on a call with investors. “They’ve got to legalize this stuff.”