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 05/12/2023
Viridian Capital Chart of the Week: Will Stock Bounce Back as Acquisition Currency?
- The graph shows the percentage of stock in acquisition consideration for transactions targeted at the Cultivation & Retail sector.
- The green line (measured on the left axis) shows the stock percentage of consideration, while the orange line (measured on the right axis) depicts the price of the AdvisorShares Pure Cannabis YOLO ETF.
- There is a correlation between stock prices and the percent of stock used in M&A, although there is a lag because Viridian only tracks closed acquisitions.
- Interestingly, the percentage of stock increased from 13% to 43% between the third quarter of 2022 to the end of 2022, undoubtedly due to the stock rally that accompanied widespread anticipation of the passage of the SAFE Act.
- Surprisingly, the percentage only declined to 34% in Q1: 23, albeit on lower transaction volume.
- There are three reasons to expect an increase in the percentage of stock used in acquisitions:
- Optimistically, the SAFE Act was reintroduced with bipartisan support, and perhaps the eighth time is the charm? Passage of the Act would likely increase stock prices, making equity a more attractive acquisition currency. We would have thought the government had more pressing concerns like the regional bank crises or the looming federal default, but we have learned never to handicap events in the capitol.
- On a less positive note, we suspect that more deals might get done with stock because the MSOs want to preserve their cash, and even though using stock near 52-week lows is not attractive, the potential bargain-priced distressed acquisitions are. The longer the capital crunch continues, the stronger the bargaining position of major public MSOs will become. Target companies may wish for all cash deals, but beggars can’t be choosers.
- The Viridian Deal Tracker has been showing an increase in the Valuation Gap, the difference in the EV/Next Twelve Month EBITDA metric between Tier one MSOs and their potential targets. A widening gap makes acquisitions more accretive, reducing the pain of using stock at low price levels.
- The trend towards lower percentage stock deals has been ongoing for several years, but it may be about to reverse.
