You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Just ahead of the turn of the calendar, we suggested that our readers should expect a surge of mergers and acquisitions in 2021. We had a feeling we were on to something when literally two days later, during the usually dead-quiet week ahead of Christmas, Ayr Wellness announced the now closed acquisitions of Liberty Health Sciences and Garden State Dispensary, deals valued at a combined $391 million, and Columbia Care disclosed the pending $240 million acquisition of Green Leaf Medical. As we expected, this activity has accelerated into 2021 and has been one of the biggest stories thus far.
We had suggested that California, Colorado, Florida and New York would likely see M&A activity, and this has been the case, but the activity has been substantially broader. Several acquisitions have taken place in Arizona, Illinois, Massachusetts and especially Pennsylvania. We have even seen consolidation in the ancillary sub-sector, with Greenlane and KushCo Holdings announcing their pending merger. The pace of M&A in Canada has been rapid as well.
Investors may be most interested in trying to identify public companies ahead of any potential acquisition or divestment of an asset, and this is certainly worth giving some thought, but most of the M&A has been and likely will continue to be public or soon-to-be public companies buying private companies. Rather than focusing solely on trying to invest in potential acquisition targets, we think it makes sense to think about the potential value creation available to acquiring companies.
While many of the transactions announced thus far haven’t included any sort of terms beyond the price of the acquisition, several acquiring companies have shared the valuations. From our perspective, the very wide spread between what the acquiring companies are paying and their own valuations suggests that the M&A taking place will drive shareholder returns ahead. Just this week, Jushi Holdings described its pending acquisition in Massachusetts at a price of 4.5-5X projected 2021 EBITDA and 2.9-3.2X projected 2022 EBITDA. Similarly, TerrAscend described its pending acquisition of three dispensaries in Pennsylvania as a “mid-single digit multiple” of projected 2021 EBITDA. Cresco described its pending acquisition in Massachusetts that it announced in March as 4-4.5X projected 2021 EBITDA. In all of these cases, the expected multiples are substantial discounts to their own valuations. If the acquiring companies are correct in their assumptions, then their acquisition activity will boost revenue and EBITDA growth per share.
Given the highly fragmented market and the wide spread between public and private valuations, we expect to see more M&A going forward. Many of the companies that will be consolidators raised capital earlier this year, some of which could be used to fund the cash portion of any acquisition. Additionally, the big spike in prices early in the year may have interfered with negotiations, as the companies looking to sell realized they would get fewer shares. The recent retreat that has resulted in most of the leading MSOs pulling back to within 20% of their year-end price may prove to be a silver lining in terms of enabling more M&A in the months ahead. We continue to see M&A as one of the most important cannabis industry dynamics at this time.
With a deluge of new investors relying on social media as a source of investment news and opinions from anonymous people, it can be extremely challenging to figure out what’s actually worth paying attention to. Understanding what news is material and what will drive share price and valuations is paramount as a cannabis investor. Being able to decipher complex M&A deals, capital raises and company earnings quickly is equally critical.
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Alan & Joel