OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
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Chart of the Week
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.
Week ended 05/03/2024
Viridian Capital Chart of the Week: Is M&A Activity Using Stock as Currency About to Re-Ignite?
- M&A activity in the Cultivation and Retail sector (as shown by the green bar depicting total transaction value) plunged in the first half of 2021. One contributing factor was the cratering of equity prices (represented by the MSOS ETF price shown by the orange line). Another was the tightening of the capital markets. MSOs were in cash husbanding mode rather than expansion mode.
- Transaction volume has not picked up, even after the HHS’s recommendation for rescheduling on August 30, 2023.
- However, conditions that led to the decline in M&A are beginning to shift:
- Rescheduling to S3 will save the top 10 MSOs more than $700M annually, and these funds will begin to foster renewed industry consolidation.
- Equity prices have begun to move upward slowly in anticipation of S3.
- The Valuation Gap, showing the valuation metric differential between large and small companies, is at a three-year high. The gap indicates that M&A has become more accretive for the Tier 1 MSOs.
- Accordingly, we have begun to see some increases in the percentage of M&A consideration paid in stock (as depicted by the blue line). It’s a bit early to call this a trend as it is based only on YTD 2024 activity, but…
- Three other factors support this trend:
- Equity prices will likely increase faster than new capital inflows as banking reform and uplisting activity lag due to legislative paralysis. It will become more advantageous to use equity in M&A deals than to raise cash in the capital markets.
- The bargaining power of tier-one MSOs will continue to rise relative to their smaller and generally private targets as the cost of capital differentials begins to increase.
- A significant number of smaller competitors are “tired” of the battle they have been forced to wage over the last two years and are now candidates for sale.
- The second half of 2024 and early 2025 are likely to see an upswing in M&A activity, much of it fueled by an increased use of stock in consideration.
