Part 2: Alcohol & Tobacco Recircle Cannabis

This week, I wrote about recent signs that large Alcohol & Tobacco (A&T) companies are getting serious about entering the cannabis space through 1) leveraging their fortress balance sheets to buy ‘good’ cannabis companies cheap and; 2)  using their lobbying skills & war chest for regulatory capture. 

Now, I’ll speak to how A&T could enter the sector and what they would be looking for.  

I have provided strategy consulting support to some A&T companies including helping them assess the cannabis opportunity.  I can’t discuss specifics but can tell you how they look at the market.  Of course, each firm sees cannabis entry through its own situational , financial and timing lens.

A&T comes to cannabis from a position of strength, not weakness. To them, the decline of their core North American business is somewhat overblown by cannabis players and can be offset by things like marketing elan and more emerging markets business.

Most A&T will be is interested in cannabis as a source of new category revenue (duh!) which complements their current operational and growth strategy. 

This view has important implications.  A&T is not desperate especially when they can influence regulations and the price of cannabis M&A is low/falling.  Secondly, A&T will act strategically and be capabilities focused. They want to leverage their distribution network, brand marketing and IT backbone.  Finally, they will try to learn from their peers (e.g, Constellation, Altria) and thorough sector due diligence to make informed (versus knee-jerk) decisions.

It is a safe bet that interested A&T firms will choose the M&A or joint venture route versus building a weed business from scratch.  

Accordingly, they will be looking to find deals that deliver:  

> Hefty revenues - Size matters as A&T needs to move the revenue dial and impress the capital markets;

> Defensible IP – unique things like genetics and tech that can’t be developed easily by them or found elsewhere;

> International licenses – Their ability to plug the target into their global operating platform is a plus;

> Clean bill of health – there must not be compliance, product or legal skeletons in the closet.
 
Conversely, A&T won’t care as much about:

- Distribution & branding – A&T already have these

- Culture & team – they are incorporating the assets and select staff into their firms;

- Assets – most of these wouldn’t pass their operational muster.

Suitable MSOs & LPs need to understand how large A&T companies think so that they can adjust their strategies and investment decisions accordingly.  What they shouldn’t be doing is building their firm to be sold or merged.  That is a recipe for underperformance. In a buyers’ market A&T can be choosy and go for ‘built to last’ firms.

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