Cannabis – The UK’s burning M&A issue

It’s a widely-known fact that cannabis is a controlled substance in the UK, a class B drug that is illegal for recreational use. However, it is also a fact that cannabis and its associated products constitute an industry that is rapidly becoming one of the most widely talked about in the UK, Europe and throughout the world.

Despite the drug’s legal status, numerous factors are contributing to it becoming a defining M&A trend of the 2020s: a rapidly shifting legal and regulatory landscape; a thriving sector with a wide array of innovative and well-capitalised businesses; and, increasingly, a tide of opinion in favour of a more tolerant approach.

Clearly, for those looking to invest or buy into this sector, the situation is highly complex and, despite the massive potential inherent in the cannabis market, there are numerous competing issues that will govern its future in the UK and elsewhere.

The market as it stands

The cultivation, distribution and possession of cannabis for recreational purposes in the UK is criminalised, restricting any commercial activity for the drug on a recreational basis. However, there are numerous ways in which the market has evolved around this, particularly over recent years.

Before getting onto the UK’s commercial cannabis market, it should be noted that the UK has surprisingly, been the world’s largest producer and exporter of cannabis-based medicines for several years. This is as a result of the production and export of the medicines Sativex and Epidiolex – both of which contain cannabis – by UK firms growing cannabis on a huge scale for American firm GW Pharmaceutical.

The UK’s current cannabis-related market perhaps began in earnest in 2016, when the Medicines and Healthcare Products Regulator (MHRA) announced its decision to legalise some products containing cannabidiol (CBD), which is derived from cannabis.

The MHRA’s decision meant that CBD-based products – albeit containing no more than 0.2 per cent THC (the psychoactive agent in cannabis) – could be legally sold in the UK, creating the booming CBD market we now see on high streets across the UK everyday. CBD is now used as the basis for a wide variety of wellness products, such as creams and oils, as well as in food and vaping products, among others.

Following this decision, in 2018, cannabis was legalised for medicinal use in the UK. While this is, naturally, subject to stringent regulations, the decision opened up markets for cannabis-derived medicines, imported medicinal cannabis and private clinics.

Since then, the Financial Conduct Authority (FCA) has confirmed that CBD and medical cannabis companies will be able to list on the London Stock Exchange (LSE) and said that it has received a number of enquiries from firms looking to list.

However, the FCA’s rules come with a stipulation that, for many, encapsulates what is holding back the UK’s cannabis market. In order to list on the LSE, firms must be able to demonstrate that their global activities would be legal in the UK. If a company carries out legal activities in other areas that would be illegal in the UK, then the company would not be able to list. This essentially blocks firms that have overseas operations related to recreational cannabis from listing in the UK.

This is indicative of the legal barriers that still ensnare the market in spite of the loosening of restrictions over recent years. As long as recreational cannabis remains illegal in the UK, some firms will still either choose not to enter the UK market, or will be prevented by rules such as the FCA’s guidelines, the Proceeds of Crime Act (PoCA) or even their own “vice clauses”.

Even so, the advances of the past few years have helped the UK to set itself out as a leading CBD and medicinal cannabis market. CBD is forecast to generate £690 million in sales in the UK this year – far beyond the forecasts of a few years ago – and the UK is said to have one of the world’s most evolved regulatory frameworks for CBD.

The UK has also recently been revealed to be Europe’s fastest growing market for investment in cannabis. Despite the aforementioned obstacles, private transactions are estimated to have raised around £36 million in the UK in the first half of this year. While, following the FCA’s decision to allow cannabis companies to list on the LSE, £45 million has been raised on the stock exchange in the same period.

LSE plc’s Head of UK Primary Markets and AIM Marcus Stuttard commented: “A growing number of cannabis related companies are choosing London Stock Exchange to continue their growth journey and we expect this pipeline to remain active.”

Private investment hesitant as public listings gather pace

Venture capital
Across Europe, investment in cannabis is dominated by venture capital (VC), which accounts for 42.1 per cent of capital privately invested in the sector in Europe. The presence of VC firms is also noticeable within the UK, with £36 million in private transactions in the first half of 2021.

Major deals include Oxford Cannabinoid Technologies’ 2018 Series A fundraising, which was worth around £7.3 million and attracted investors including Los Angeles-based Venture Capital firm Casa Verde.

While this is a trend that is likely to grow over the coming years, these kinds of private transactions are currently being limited by the UK’s restrictive cannabis legislation. Juan Martinez of New York’s Measure 8 Venture Partners explains how the UK’s criminalisation of recreational cannabis is impacting venture capital investment in the UK:

"Most VC (venture capital) funds have vice clauses in their mandates, which makes it very hard for us as investors, even in the US where it's still federally illegal. Decriminalization is the first step to removing these obstacles. We can see a lot of demand, but there won’t be significant growth until regulation changes.”

While there has been some venture capital activity in the UK’s cannabis market, the legal status of cannabis within the UK means that private transactions are simply too risky for many to get involved in. For now, this seems to be a segment with untapped potential that could be poised for explosive growth should the UK’s legal framework relax further in future.

The public markets
Like venture capital investment, public listings in the UK are also subject to legal constraints, namely those imposed by the FCA and the PoCA. However, by comparison, the clear legal framework provided by the LSE means that public transactions are proving more popular in the UK than their comparatively murky private counterparts.

Since the FCA announced in September 2020 that medicinal cannabis firms could list on the stock exchange, there have been an influx of listings that have seen London establish itself as the leading public investment hub for cannabis in Europe.

Major listings include the massively oversubscribed IPO of Cellular Goods, with demand reportedly exceeding the size of the deal by 13x and bringing its market capitalisation to more than £100 million.

The listing of Cellular Goods, which makes skincare products utilising CBD, is also indicative of a major trend in the UK’s cannabis sector: Angel investors. Among Cellular Goods’ backers is the firm DB Ventures, owned by football superstar David Beckham.

Other high-profile angel investors in UK CBD firms include boxer Anthony Joshua and singer Will.I.Am.

M&A – The major players driving the UK market

With legal factors stymying investment to certain degrees for both private fundraisings and public listings, much of the cannabis-related activity in the UK is happening in the form of private acquisitions of UK startups by both domestic and international buyers.

Big overseas players stake their claim in the UK
Obviously, acquiring such companies can help bigger players get a foothold in the UK’s rapidly growing CBD market as they hope for/await a time when regulations make investments and listings more straightforward and profitable.

Due to the fact that the UK is relatively far behind markets such as the USA and Canada, it makes sense that overseas firms with strong existing cannabis/CBD operations would seek to use their power and deploy their capital by acquiring smaller UK firms.

For UK CBD and cannabis startups, such acquisitions can offer incredibly profitable opportunities to develop their product lines and maximise their growth through international expansion.


This was the case for Birmingham-based Vitality CBD, which was acquired for £10.2 million in August by Canadian CBD firm Yooma, shortly after its listing on London’s AQSE Growth Market. Founded in 2018, Vitality produces a range of CBD-based wellness products including creams and oils.


While by no means a minor player in the UK’s CBD market – Vitality generated £1.6 million revenue in the first half of this year and stocks its products at retailers including Tesco and Boots – the acquisition by a global firm like Yooma offered Vitality the opportunity to take its growth to the next level.


Post-acquisition, Yooma confirmed that it would seek to grow Vitality’s revenue and margin, while ramping-up distribution of its products to new international markets.


Vitality’s co-founder and MD Nikhil Nathwani commented: “The whole team is excited to be joining the Yooma group. CBD is a growing industry, not only in the UK but globally, and the acquisition positions us nicely to be able to continue to expand and grow the business."


For Yooma, meanwhile, the acquisition represented a milestone as the first takeover in the company’s global buy-and-build strategy. Yooma’s Chairman Lorne Abony said: "Completing the acquisition of Vitality is the first step of the strategic plan the company outlined to investors at the time of our UK financing and dual-listing - to buy and build companies globally, focused on materially increasing the company's top-line revenue, leveraging the group's integrated supply chain to drive margin growth and expanding distribution for the existing product portfolio.”


"This acquisition will help accelerate our growth by exporting these branded products to other Yooma jurisdictions and integrating with our MYO Plant Nutrition operations and distribution.”

Domestic firms look to supercharge growth with acquisitions
Acquisitions of UK CBD firms are, of course, not merely limited to larger overseas buyers. One of the best ways that rapidly-growing firms in the sector can increase their revenue and drive further growth is to snap up start-ups, adding their product lines, clients and customer base to their own offering.


Halifax-based Fen Group is one such UK CBD firm that is looking to establish its position in the market through strategic takeovers of rival firms. In April, the Fen Group made its first takeover in a planned acquisition drive with a deal for CBD contract manufacturing specialist White Label 360.


The acquisition brought White Label 360’s broad product offering (including flagship brand CBDeaze) and client portfolio to the Fen Group, as well as potential distribution channels in Germany and South Africa.


Commenting on the deal, Fen Group CEO Tom Fennell said: "This acquisition allows Fen Group to rapidly increase our revenues, whilst keeping our core value proposition consistent, we are very excited to build on the foundational work that Colin (White Label 360 CEO Colin O’Donnell) has put in.”


O’Donnell added: I am looking forward to working with Fen Group as they endeavour to bring structure into such a fragmented CBD market in the UK."

Tobacco giants look to the future
The cannabis market, despite its issues, is on a sharp upward trajectory across the world as regulations ease and firms expand. By contrast, tobacco is heading in the opposite direction as millions quit smoking across the world each year.

We are, of course, a long way from tobacco being made illegal (or, for that matter, from cannabis being made widely legal for recreational use), but tobacco firms seem to have been among the earliest to identify the way the tide is moving. As a result, many are already taking steps to diversify their product range as they look ahead to a time when tobacco products are not their core offering.

In recent years, tobacco firms have been acquiring businesses across sectors such as healthcare and vaping. Naturally, some have also begun to target CBD firms as they look to tap into one of the world’s most promising emerging sectors.


The UK’s largest tobacco firm, British American Tobacco, has been among the leading advocates of a move towards CBD products. The firm, which has signed a deal to research a new range of CBD and cannabis products, acquired a stake in Canadian medical cannabis firm Organigram earlier this year and has spoken openly about CBD vaping being a major part of its plans.

With the UK home to such a flourishing CBD market, it won’t be long before UK-based startups find themselves targeted by multi-national tobacco firms. A major barrier to such deals, however, may turn out to be the potential negative connotations that CBD firms (many of them focused on health and wellness) could gain from being owned by a tobacco firm.

The impact that such associations can have for healthcare-focused firms has been demonstrated recently by the backlash faced by inhaler maker Vectura following its acquisition by Philip Morris, with the firm having subsequently been barred from numerous pharmaceutical conferences.

The scale of the capital that tobacco firms have at their disposal could certainly help to smooth over any such concerns on the part of CBD business owners. However, much may still depend on tobacco firms making active moves away from cigarettes, rather than simply diversifying their product ranges.

What does the future hold for the UK’s cannabis market?

The UK’s flourishing CBD and medical cannabis sectors look set to go from strength to strength and should continue to generate M&A activity amid strong and growing investor interest. However, whether the sector realises its full potential could have much to do with whether legislation on the recreational use of cannabis is loosened.

Earlier this year, Mayor of London Sadiq Khan announced that he would launch a review into the decriminalisation of cannabis. This was swiftly met with condemnation from the government, which said it had no plans to change the law and that the issue was not in Khan’s remit.

Both sides of this dispute are indicative of the UK’s current landscape. On the one hand, there is widespread support for a more lenient approach to cannabis, with polls regularly showing that more than half of Brits support decriminalisation. On the other hand, the Conservative government, while no doubt recognising the financial potential of the sector, is perhaps wary of alienating traditional voters by taking a softer line on recreational drug use.

This deadlocked position, which shows little sign of an imminent resolution, will be of little comfort to investors who find themselves prevented from or hesitant to enter the UK’s market due to cannabis’ legal status.

However, while legality does appear some way off, the success of CBD and medicinal cannabis firms, combined with the clear investor interest in the sector have led to forecasts that decriminalisation will ultimately prove inevitable.

Karan Wadhera of LA-based firm Casa Verde Capital, one of the USA’s leading cannabis investors, says: "Cannabis is a low-hanging fruit, or plant in this case, that can be leveraged for tax. I think it's only a matter of time until regulation catches up and like in most industries, London tends to be at the center of what's happening in Europe.”

When and if full decriminalisation does happen in the UK, the cannabis and CBD sector, which is already performing very well in spite of so many constraints, will be fully unleashed.

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