The cannabis industry is undergoing a period of transition as regulatory changes, such as the DEA's announcement to reschedule cannabis, are reshaping the landscape. In response to these shifts, a report from Viridian Capital Advisors highlights the expected surge in mergers and acquisitions (M&A) activity within the industry in the near future.
One key trend identified in the analysis is the widening valuation gap between Tier 1 multi-state operators (MSOs) and smaller entities, which has now reached a three-year high. This disparity in market capitalization is making M&A increasingly beneficial for larger companies, allowing them to achieve more growth through acquisitions at relatively lower prices compared to their market value.
The report emphasizes that Tier 1 MSOs like Curaleaf Holdings, Green Thumb Industries, Trulieve Cannabis, and Cresco Labs are positioned advantageously due to their lower costs of capital, which gives them the financial leverage to pursue and close deals more effectively than smaller, privately-held competitors. As a result, larger companies are expected to capitalize on this situation, leading to a period of consolidation in the industry as smaller players seek opportunities to exit the market.
Moreover, the use of elevated public company stock prices and healthier cash balances is anticipated to drive a notable rise in M&A activities in the second half of 2024 and early 2025. This strategic approach allows companies to utilize their stock as currency for acquisitions, given the challenges in obtaining cash due to slow progress in banking reforms and legislative updates. By relying on equity financing for M&A transactions, companies can preserve cash for operational needs and reduce new debt risks, leveraging high stock prices during favorable market conditions.