Cannabis 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.

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.