Chart: Consolidation Is Inevitable In The Fragmented Cannabis Industry

Chart: Consolidation Is Inevitable In The Fragmented Cannabis Industry

The six largest U.S. MSOs combined accounted for approximately $5.0B (20%) of cannabis industry revenue in 2021. No single competitor represented as much as 5% of the total.

Approximately 9,900 small companies with average revenues of around $1.6M accounted for over 60% of total industry sales. 

In contrast, the 9,100 U.S. craft beer companies in 2021 represented only 27% of beer revenues.

As cannabis approaches legalization, the necessary scale of businesses will increase. The industry is capital-intensive, and tremendous sums will need to be spent to establish national brands, distribution systems, and centralized production facilities. 

The size of likely new entrants to the industry dwarfs current competitors. The average enterprise value of the top 5 alcoholic beverage companies is about $23B, over four times the size of the largest MSO. Similarly, the smallest of the big three tobacco companies has an enterprise value of more than twice as large as all cannabis companies combined.  

Another powerful driver of consolidation is the cost of capital. The table's rightmost column shows the EV / Revenue multiples of the market cap brackets. The average valuation multiple for the largest MSOs is more than twice that of the tier 3 competitors, implying an enormous cost of capital advantage that makes it nearly impossible for the smaller companies to maintain growth. 

As the industry gets closer to federal legalization, we anticipate a wave of consolidation as companies seek to position themselves to achieve economies of scale in production, marketing, and logistics that are not yet available in the state regulatory regimes.

As in the beer industry, there will always be thousands of craft cannabis companies, but the share of revenues earned by the largest competitors is likely to double over the next five years.

 

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.

 

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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