California’s legal cannabis market got one thing very right. And now, it’s ushering in a brand-new wave of opportunities…
When it comes to cannabis, few markets hold as much promise as California‘s.
If it were an independent country, California’s economy would rank as the fifth-largest in the world.
Only titans like China, Japan, and Germany punch more weight on the global scene, with California’s $3.2 trillion yearly output comprising more than one-seventh of the United States‘ productive activity.
It’s no wonder that when the Golden State began recreational cannabis sales in 2018, visions of massive pot payoffs flew nightly through the minds of entrepreneurs.
Indeed, the state’s 23 million adults could ultimately spend over $10 billion per year on cannabis given typical consumption patterns – and that’s not counting the spending power of the 42 million visitors that venture through California each year.
But California’s legal cannabis roll-out underperformed expectations.
Sales under the recreational program actually declined in 2018 from the year before, and this caused officials to wildly overestimate how much money they could squeeze from the system. Tax receipts came in at about one-third of the expected $1 billion tax haul.
Today, things are turning around for California’s cannabis retailers – and investors now have a wide-open opportunity to pack their portfolio with profits as the biggest cannabis market in the world gears up to fulfill its true potential.
I’ll tell you where to look for those opportunities in just a moment.
A Brief History of Legal Cannabis in California
California’s recreational use laws gave individual jurisdictions considerable flexibility in determining for themselves to what extent they would allow cannabis sales to proceed. This resulted in a patchwork quilt of regulations across California’s 482 cities and 58 counties.
In 2018, operating a cannabis business of any kind was prohibited in more than two out of three cities and counties. When it came to running a business that can sell cannabis products to a customer, the restrictions were even more severe. Less than one-fifth of California cities allowed a medical-only dispensary, and less than one in seven allowed recreational dispensaries.
Not surprisingly, the state’s narrow-minded politicians – who mostly believe that entrepreneurs serve at the pleasure of the state – wildly over-taxed the system. Between an excise tax, sales taxes, and other hands in the pot, a consumer can pay anywhere between 23% and 38% in taxes.
Once again, California politicians’ overbearing approach inevitably gave illicit market sellers more than enough opportunity to keep their hold on consumer demand.
But the state did get one very important aspect right – competition.
Applying for a license was relatively easy.
Today, there are more than 500 dispensaries and over 1,000 brands competing for market share among a very selective population of cannabis consumers.
While this made for rough sledding for dispensary owners and brands competing for shelf space, those companies that managed to rise above the competition are now perfectly positioned to lead the consolidation wave that’s currently sweeping the state.
And behind them stand hundreds of millions of dollars in cash from special-purpose acquisition companies (SPACs).
Last December, a SPAC operating under the name of Subversive Capital Acquisition Corp. proposed to combine three cannabis companies – Caliva, Left Coast Ventures, and Monogram, plus Shawn “Jay-Z” Carter‘s marketing empire (which he runs under the banner of Roc Nation) – into one, big vertically integrated cannabis company.
The deal closed in January, and the new company – TPCO Holding Corp. (OTC: GRAMF) – is now the largest cannabis company by revenue in California.
In one fell swoop, this deal created a company with expected combined revenues for 2020 reaching $185 million. With that level of sales, TPCO Holdings will likely outpace Harvest Health and Recreation (OTC: HRVSF), MedMen Enterprises Inc. (OTC: MMNFF), and TILT Holdings Inc. (OTC: TLLTF) – and that’s all from just one state.
Then, early last month, another SPAC focused on the cannabis sector – Mercer Park Brand Acquisition Corp. (OTC: MRCQF) – entered into an agreement to merge with Glass House Group and Element 7, which hold 17 proposed retail licenses.
The total value of the deal is $567 million and includes an $87 million private placement alongside the SPAC investment. Once the deal closes, and assuming no SPAC redemptions, the combined company will have $355 million in cash to fuel even more acquisitions and expand retail operations with the retail licenses from Element 7.
I met with the co-founders of Glass House last October while I was in Southern California and toured their grow operations. You can check out that footage right here.
And just last week, I sat down with the leaders behind Glass House again to discuss this new deal and what it means for investors.
Check out our conversation below to get all the details:
This interview was first sent to members of Danny Brody’s Cannabis Inner Circle. To learn how you can be among the first to gain access to exclusive content like this, including the full Inner Circle model portfolio that contains the top SPAC recommendations on the market right now, click here.
Executive Director, National Institute for Cannabis Investors
May 04 2021