In 2012, Colorado was one of the first states in the nation to legalize recreational cannabis for adults. Since then, the state has grown to become one of the most lucrative cannabis markets globally; the industry was estimated at over $2.2 billion in 2020.
When the legislation to legalize recreational cannabis was initially passed, it included provisions that prevented publicly traded companies from entering the state. Instead, regulators wanted to give smaller, “mom and pop”-type businesses a chance to get their feet under them before competing with large corporations. For nearly a decade, the industry flourished without the investing public being able to take advantage.
This changed in 2019 when the legislature passed a bill overturning the ban on publicly traded cannabis companies. Unfortunately, this coincided with a downturn in the overall cannabis industry that persisted throughout 2019. Then, in 2020, COVID-19 presented another roadblock to companies looking to consolidate the industry. Until now, this has resulted in there being relatively little M&A activity in the state.
The largest cannabis company in the world by market cap, Curaleaf (CSE: CURA) (OTCQX: CURLF), has its eyes on the Colorado market and is looking to refocus its efforts there. Curaleaf first entered the state in March 2020 with the acquisition of BlueKudu, a purveyor of premium cannabis-infused edibles. In addition to the popular lines of chocolates and gummies BlueKudu was known for, the acquisition also gave the company the foothold needed to introduce their flagship Select brand to the state.
In early October, Curaleaf acquired Los Sueños Farms, one of the world’s largest legal outdoor cannabis growers. The deal comes with 66 acres of outdoor cultivation, a premium indoor growing facility and two operating recreational cannabis dispensaries.
The CEO of Curaleaf, Joseph Bayern, commented on the acquisition:
“The acquisition of Los Sueños will add over 50,000 pounds per year of low-cost wholesale capacity to Curaleaf’s footprint in Colorado, which we intend to double to over 100,000 pounds, representing a significant market share. As the largest producer of biomass in the state, this facility will also fuel the further deployment of our Select product line, which can already be found in 230 independent dispensaries in the state.”
The Los Sueños Farms marks Curaleaf’s entrance into both the growing and retail segments of the Colorado industry; previously, they purchased raw ingredients on the open market, manufactured their Select line and other brands at BlueKudu facilities, and distributed to independent dispensaries. Now, they will pursue a vertical integration strategy similar to many other states they operate in. It seems like only a matter of time until the next acquisition in the state is announced.
Schwazze (OTCQX: SHWZ), previously Medicine Man Technologies, was one of the first public companies to enter the state in a meaningful way. Taking a page out of the Trulieve (CSE: TRUL) (OTCQX: TCNNF) playbook, management believes the best course of action is to go as deep as they can in one state before they expand to others. Schwazze’s strategy has shown to increase margins and cash flow, leading to less dilution and expensive debt to fund expansion.
Before Colorado allowing public cannabis companies into the state, Schwazze wanted to gain a foothold in the state, so they began to acquire cultivation supply and retail companies. The company’s targets were Success Nutrients, a popular line of hydroponic supplies, and The Big Tomato, a hydroponic supply store in Aurora, a suburb of Denver. These acquisitions gave Schwazze a great deal of insight into what would be involved in running their own growing facilities.
In April 2020, Schwazze acquired Mesa Organics, which operated an eponymous chain of successful cannabis dispensaries. Mesa Organics also owns the popular Purplebee brand, which can be found in their dispensaries and offers a line of extract products, including concentrates, vapes and topical creams.
Next up, Schwazze acquired Star Buds, one of the most popular dispensary chains in the state. Announced in December 2020, the deal was completed in March of 2021 and included 13 dispensaries across the state. Schwazze also rebranded their Mesa Organics dispensaries as Star Buds. Today, there are a total of 17 Star Buds dispensaries open across the state.
Most recently, Schwazze announced it signed a definitive agreement to acquire BG3 Investments, LLC, which owns two dispensaries in Denver, and Brow 2, LLC, which owns a 37,000 square foot indoor growing facility. Both deals were announced in Q3 2021 and show that Schwazze is still very much active on the expansion front.
The Race is On
Colorado is one of the most mature and valuable cannabis markets in the world. It’s a no-brainer destination for large cannabis companies, but for too long, outside investors were kept out of the state. Now that the laws have changed, the race is on to consolidate the state. Look for more M&A activity in the near term, with companies like Curaleaf and Schwazze right in the thick of it.
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The Cannabis Investor does not hold a position in any of the stocks mentioned in this article.