From Growth To Distress: The Changing Strategy Of U.S. Cannabis M&A

Total U.S. targeted cannabis M&A is down 73.6% from $10.2B for the trailing twelve months ended 1/27/22 to $2.7B for the LTM ended 1/27/23. The first four weeks of 2023 are down even more sharply, off nearly 98% from the same period in 2022.

Two opposite trends are pulling on U.S. M&A volume:

• Retrenchment and concentration on cash flow rather than growth. As shown by AYR's AYRWF cancellation of its $55M dispensary purchase in Chicago this week and Curaleaf's CURLF exit from three Western states. The Cresco CRLBF/Columbia Care CCHWF megadeal hangs in the balance, with the arb spread saying that the deal will likely be canceled or recut.
• Distressed asset sales: Record tightness in the cannabis capital markets. ongoing pricing compression and inflationary margin pressures are pushing small to midsized companies into liquidity crises, driving increased distressed M&A opportunities for the right buyers.

The rugged operating and financing environment will be healthy for the industry, clearing away those unable to respond to the challenges and strengthening those that took the opportunity to improve their cash-generation capability.

It will present once-in-a-lifetime opportunities for investors/companies/acquirers who can discern deep value and assemble distressed assets at deeply discounted prices.

There has also been a significant change in the state-by-state composition of transaction volume.

• No state accounted for > $500M of volume in this year's LTM period. In contrast, 4 states had higher totals last year: CA ($3.1B), CO ($991M), PA ($919M), and FL ($780M).  

• California (whose $3.1B total is cut off from the light green part of the graph) had more M&A volume in last year's LTM than all 50 states combined this year.

• Washington was the top state in total transaction volume this year due to the $444M Merida Merger Corp. SPAC deal for Leafly LFLY in February 2022.

• 72% of New York's total was composed of the April 2022 $247M acquisition of Etain LLC by RIV Capital.

• Nevada had eight transactions in the LTM, led by the $181M acquisition of Tryke Corp. by Curaleaf.

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.