Valuation Tracker

Weekly Valuation Report – Does Vireo Suggest the Consolidation Wave Is About to Break?

• Most market participants (ourselves included) were surprised by the Vireo mega-deal, smashing together four geographically distinct but successful companies to create the next big MSO.
• For those of us who’ve been watching the scene, it all kind of made sense. Most of the consolidation we have been seeing is intramarket consolidation – operators in Missouri, for example, combining to gain scale and bargaining power. The reason is apparent; it’s just too difficult to combine existing MSOs due to the territory overlap and the need to shed duplicate operations. However, a rollup of distinct players with no overlap is much more plausible.
• Of course, it begs the whole MSO question of where is the synergy or gains from scale are if each unit still has to stand on its own inside a state silo. The semi-controlling interest of Chicago Atlantic in Vireo, predeal, seems to suggest one answer- access to financing in a market devoid of new investors. Debt people still value diversification, and maybe under one umbrella, great times in one market might buffer less prosperous times in another.
• Some observers we respect, like Marc Hauser at Cannabis Musings, went so far as to suggest the transaction is heralding a cannabis future of a consolidated industry with behemoths and craft growers/brands and not much in between.
• We have been saying for some time that we think industry consolidation is inevitable. Look at the nature of the industry. A perishable commodity product with high fixed costs, high exit barriers, and near-perfect substitutes (hemp and the illicit market), Michael Porter would tell you that anytime you see those characteristics, you are likely to see bloody price competition and a drive for scale on the one hand (big efficient producers) or for differentiation on the other hand (craft growers producing luxury products). We look at today’s market and observe that the largest competitor in a $30 billion revenue business has a market cap of around $2B (of course, it used to be a lot bigger!). It strikes us as absurd. No major U.S. industry has a leading player anywhere near that small. So, as much as one side of the cannabis cultural divide likes to bemoan the hegemony of the big bad MSOs, we believe that the biggest of them need to become much, much bigger!
• We at Viridian, however, like to ask the question, “What is the market telling us?” At one point in the not-so-distant past, the tier 1 MSOs traded at significantly higher valuation multiples than those of the next lower-size group. We publish a graph depicting this phenomenon every week, which we call the Valuation Gap. We graph the aggregate enterprise value to Next Twelve Months EBITDA estimates for a group of large companies including Cresco (CL: CSE), Curaleaf (CURA: TSX), Green Thumb (GTII: CSE), TerrAscend (TSND: TSX, Trulieve (TRUL: CSE), and Verano (VRNO: Cboe) against the corresponding measure for a smaller company group of Ascend (AAWH: OTCQX), AYR (AYR.A: CSE), Cannabist (CBST: Cboe), 4Front (FFNT: CSE), Jushi (JUSHF: OTCQB), Schwazze (SHWZ: OTC), Vext (VEXT: CSE) and Vibe (VIBE: CSE).

• Indeed, the Valuation Gap did point toward consolidation early in 2024. When the gap is large, it is conducive to a large MSO buying a small MSO using stock. The large company trading at a much higher multiple made it easy for such deals to appear accretive. But that is definitely NOT what we are seeing now. The gap has turned negative and, in fact, is the lowest it has been since we began measuring it around four years ago. The smaller group actually trades larger multiples than the larger group. If anything, perhaps the market is calling for De-consolidation.
• We think the longer term still calls for significant consolidation, but the market is telling us that we should not be expecting the next Trulieve/Harvest deal anytime soon. Of course, last week’s news of AYR’s CEO joining the Tilray board was undoubtedly enough to make us say, “Hmm.”