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The graph depicts stock as a percentage of total M&A consideration (green line) against an index of cannabis equity prices (orange line). We have included all transactions for U.S. Cultivation & Retail sector acquirers buying other Cultivation & Retail sector companies, where total consideration exceeds $25M and information on consideration composition is publicly available. We have also included the TerrAscend/Gage Transaction, which we believe is likely to close before the end of Q1:22.
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The graph shows a positive historical relationship between cannabis stock prices and the percentage of stock used in M&A deals. This association makes logical sense: as a company’s currency increases in value, they should logically want to use it in transactions.
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The black dotted line shows an upward trend in the percentage of stock used in cultivation M&A deals. The 70%+ figures shown for Q4:21 and Q1:22 are indicative of what we believe is an emerging trend of higher stock components. The trend is counterintuitive given the fact that cannabis stocks are now at multi-year lows.
We believe several factors are driving this upward trend:
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Target companies are increasingly looking at the stock merger consideration as an attractive investment. But, isn’t it always better to get cash, since if you like the stock of some MSO, you can always take your cash and buy the stock? The problem is that cannabis stocks are relatively illiquid, and it is not easy to accumulate a significant position without pushing the prices higher. The owners of closely held sellers may be more interested in finding a rewarding investment for their proceeds than liquidity.
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We also see a trend towards larger public/public deals of the Verano/Goodness growth ilk. The larger size of these deals makes financing cash purchases more difficult, despite the availability of attractive debt terms.
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The valuation gap we have been talking about is another critical consideration. It doesn’t matter that my stock price is lower as long as the stock price of my target (or the private market analog) is also lower. It is not the absolute value; it’s the gap.
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Finally, we believe that smaller companies increasingly find it more advantageous to combine with larger companies to achieve economies of scale and lower capital costs. Larger acquirers may be gaining negotiating power to insist on more significant stock components.
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
Launched in January 2015, and having analyzed more than $60B in deals, the Viridian Cannabis Deal Tracker is a proprietary data service that monitors and analyzes capital raise and M&A activity in the legal cannabis and CBD industries. Each week the Deal Tracker provides proprietary data and market intelligence on transactions, including:
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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)
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Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A)
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Principals to the Transaction (Issuer/Investor/Lender/Acquirer)
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Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
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Deals by Location of Issuer/Buyer/Seller ( To Track the Flow of Capital and M&A Deals by State and Country)
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Credit Ratings (Leverage and Liquidity Ratios)
Photo by Javier Hasse.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
