The panel “Who’s Winning In M&A? East Coast vs. West Coast (The Biggie-2Pac Dilemma)” took place at the Biedex Markets Cannabis Capital Conference in Florida, where industry experts shared their forecasts about trends in marijuana M&As.
Scott Greiper, CEO and founder of Viridian Capital, presented hard data. The Viridian Cannabis Deals Tracker, which has been monitoring the topic for nine years, indicates that the cannabis industry has not yet recovered to its highest level of M&A activity seen in 2021, in terms of both the number of transactions and their dollar value. However, the first quarter of 2024 is heating up, with the average deal size reaching a yearly high of $20 million. Multi-state operators (MSOs) are the most aggressive buyers. M&A activities are on the rise due to improved performance of stock prices in a market rallying on the hope of cannabis rescheduling.
The Viridian M&A tracker has shown that major regulatory announcements have significantly impacted value. However, Greiper said there is still an upside for the industry and consolidation is expected to achieve size and scale if the industry is eventually going to resemble the alcohol or tobacco sectors.
Participants Emily Paxhia, Eric Espinoza, Dustin Milner and Robert Nederhood provided their take on the subject.
New Markets Vs. Old Markets
“We’ve lived in such a capital-deprived time that it is very hard to imagine leaning into very cash-heavy transactions at this time, especially while we are waiting for what’s happening at a federal level,” remarked Paxhia, co-founder of Poseidon Asset Management.
Addressing the topic of East vs. West, Paxhia proposed that the analysis should be New Markets vs. Old Markets.
“Every market before it opens to Adult Use sees a spike in M&A, so New Markets tend to demand more capital and M&A as a way to participate. The forecast is that these new markets will depend more upon Capital Raising, like New Jersey, Massachusetts (if caps are changed),” Paxhia said. “In California, more companies are going into distress and need to work out their situations, and given that there is no bankruptcy in cannabis, this puts companies in a distressed asset sales situation.”
This difference also holds in terms of what investors should expect when moving into the cannabis space. Multi X exits might not be so likely in consolidated old markets, and the focus should be on fundamentals, while markets coming online present extraordinary opportunities.
“It’s very difficult to imagine these big multi-X exit multiples on operating assets because of limiting factors: license caps in markets and saturation. So, we are more interested in leaning on companies that perform very strongly from a fundamental standpoint. But, for example, if I had an asset in Ohio, I’d be looking probably at a pretty big multiple exits going into this opening of the adult-use market,” Paxhia added.
Pennies On The Dollar Opportunities
Eric Espinoza from Green Life Business, with great activity in California, also thinks there is an opportunity in stressed environments: “Even though there are hard deals, there are also gems popping out in the West Coast, especially in California.”
Espinoza calls these distressed companies “gems,” or companies that have called for offers because they need of capital. He mentioned that these situations might lead to picking up valuable companies for pennies on the dollar, noting that interesting investor spaces can be found on the West Coast, California, Nevada and the East Coast in New York, Florida and Ohio.
Cash Is The Most Valuable Asset
Also from California, Dustin Miller says cash is the most valuable resource in the cannabis space. The CEO of Talarya Brands said, “Due to the deprivation of capital until there is a larger influx, any cash that the company would use for acquisition is going to operations. … In this market, cash is the most valuable resource.”
Regarding the debate between markets, he says old markets offer a more stable scenario. New markets tend to give space to overpricing and instability. The operators have healthy margins, but over time those margins will become scarce due to consolidation. Therefore, as investors going aggressively into a new market might be a mistake, while old markets might offer stressed companies with tax issues and debt. These situations can be compensated by strong fundamentals and experience.
He also emphasized, “It’s not the first time we’ve seen the cycle. Throughout history, investors have seen how the cycle operates as new industries consolidate.”
Still Early For Cannabis Investors
“In the world of Biggie versus Tupac, I’m here representing EMINEM,” said Robert Nederhood, partner at Foley Lardner and a specialist in M&As.
“High margins and limited licenses can cover up a lot of bad management. When prices start to drop, those issues get exposed and these distressed assets come to the market,” Nederhood said. He added that buyers should do due diligence to ensure that the company they’re dealing with is risk-free. “In time, we will go back and say, ‘I think that was a great opportunity to buy low.’”