OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
Mergers & Acquisitions
Mergers & Acquisitions Summary
Each week, Viridian publishes insights and analysis on completed M&A transactions in the prior week. Our analysis includes:
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- M&A Market Commentary
- Public and Private Companies
- Buyers & Sellers
- YTD M&A Analysis
- M&A by Industry Sector
- Deal Structure and Valuation Analysis
- Pending Deal Risk Arb Analysis
- Valuation Gap Analysis
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Transaction Activities
Week ended 01/06/2023
- Five M&A transactions closed this week for $11.0M, compared to eight transactions for $256.9M in the prior year.
YTD Activities
- We believe the likelihood of relatively sizeable public/public M&A transactions has increased significantly based on the low trading multiples of tier 2 and 3 MSOs and SSOs, particularly those perceived to be cash flow pressured.
- No U.S. targeted M&A transactions closed in the week ended January 6, 2023.
Pending Risk Deal Arb Analysis
- The Cresco/Columbia deal spread narrowed by 110bp to 38.4% on 1/6/23. This spread signals considerable market doubt about closing this transaction despite both companies continuing to say that they are committed to the deal. The Diddy deal closing is the most significant concern as it promises to fund $180M of cash for debt paydown post-closing. The crash of equity prices has also reduced the likely proceeds from other planned asset sales in Ohio, Maryland, and Florida. Still, the deal has made significant progress towards closing, and an unannualized rate of return of 38% for a 3-month investment seems like an attractive speculation. The market is clearly saying it’s too good to be true.
Valuation Gap Analysis
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- The valuation gap widened slightly to 1.92 on 1/6/23, close to its lowest value since we began tracking this measure and 164 bps lower than its 52-week average. The valuation gap is the difference between the EV/NTM EBITDA multiple for the largest MSOs and the multiple for the less than $300M market cap group, which are their primary targets.
- This measure has been a significant driver of M&A activity since a larger gap creates an opportunity for more accretive transactions. The gap tends to increase in improving markets while declining in retreating markets to the greater trading liquidity of the larger companies.
- The gap has plunged primarily because the Tier one stocks are significantly more liquid and have accordingly traded down more sharply. In a chaotic market, the small company trading multiples may not be a good guide to the prices at which these companies would sell in an M&A setting.
- The failure of the SAFE act is more detrimental to the smaller companies, and we would expect the gap to widen as the valuation of the less liquid tiers normalizes.
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