Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Viridian Capital Chart of the Week: The Gap Between Canadian LP and U.S. MSO EBITDA Multiples Shows the Impact of 280E
- The Viridian Chart of the Week looks at the Valuation impact of 280E from a different viewpoint: the gap between the EBITDA multiples of Canadian LPs and US MSOs is largely due to the punitive effects of IRS Rule 280E.
- The orange line on the graph shows the multiples of enterprise value to next twelve-month EBITDA for the top Canadian LPs, while the blue line shows the same metric for the top U.S. MSOs. The green line shows the valuation multiple gap, now at 5.5 points, largely attributable to the fact that less U.S. EBITDA flows through to free cash flow due to 280E taxes.
- The elimination of 280E should allow U.S. multiples to exceed current Canadian multiples of 12.1x, since U.S. companies are generally more profitable, address much larger markets, and have additional positive catalysts from SAFER and other regulatory reforms. We believe U.S. multiples could more than double to 15x from their current value of 6.6x
- Higher valuations will transfer directly into higher M&A activity. Cash has been dear, and MSOs have been reluctant to use their equities as currency in acquisitions because such deals would be dilutive to their shareholders. Higher valuations will eliminate this problem, and the greater cash flows from lower taxes will also increase U.S. firms’ debt capacity. Both of these factors make acquisitions easier to finance and more accretive.
- The removal of 280E should also revive the cannabis equity capital markets, which have been in a virtual lockdown due to regulatory reform uncertainty. U.S. Operators will seize the opportunity to repair their balance sheets through equity-based debt refinancing and equity-funded increases in capital spending.
- While we do not see valuations or activity springing back to the heady days of 2021, we expect significant upticks in activity compared to levels we have seen in the last two years.
