The cannabis industry has not yet recovered to its highest level of M&A activity seen in 2021, but the first quarter of 2024 is showing signs of heating up. Multi-state operators (MSOs) are the most aggressive buyers, and M&A activities are on the rise due to improved stock prices and the hope of cannabis rescheduling.
New markets tend to see more M&A activity due to capital constraints, while established markets offer opportunities for stressed asset sales and fundamental-based investments. Cash is considered a valuable asset in the cannabis industry.
New Markets Vs. Old Markets
“Every market before it opens to Adult Use sees a spike in M&A, so New Markets tend to demand more capital and M&A as a way to participate,” said Emily Paxhia, co-founder of Poseidon Asset Management. “The forecast is that these new markets will depend more upon Capital Raising, like New Jersey, Massachusetts (if caps are changed).”
“In California, more companies are going into distress and need to work out their situations, and given that there is no bankruptcy in cannabis, this puts companies in a distressed asset sales situation,” Paxhia added.
Pennies On The Dollar Opportunities
Eric Espinoza from Green Life Business, with great activity in California, also thinks there is an opportunity in stressed environments: “Even though there are hard deals, there are also gems popping out in the West Coast, especially in California.”
Espinoza calls these distressed companies “gems,” or companies that have called for offers because they need capital. He mentioned that these situations might lead to picking up valuable companies for pennies on the dollar.
Cash Is The Most Valuable Asset
Dustin Miller, CEO of Talarya Brands, said, “Due to the deprivation of capital until there is a larger influx, any cash that the company would use for acquisition is going to operations. … In this market, cash is the most valuable resource.”
Still Early For Cannabis Investors
“In the world of Biggie versus Tupac, I’m here representing EMINEM,” said Robert Nederhood, partner at Foley Lardner and a specialist in M&As. “High margins and limited licenses can cover up a lot of bad management. When prices start to drop, those issues get exposed and these distressed assets come to the market,” Nederhood said.
He added that buyers should do due diligence to ensure that the company they’re dealing with is risk-free.
