Viridian Capital Explains M&A Activity Boom in Cannabis Industry Projecting Further Growth

Photo by CRYSTALWEED cannabis on Unsplash

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

The cannabis industry is rapidly becoming the largest consumer products industry in the world.

Experts project that the global legal cannabis market will reach $70.6 billion in monetary value by 2028. The U.S. market alone is expected to pull about $43 billion by 2025. Considering the fact that the U.S. alone is anticipated to rake in more than half of the global projection, there is no better time to invest in the cannabis industry than now.

Cannabis is already the next big thing because the industry is seeing massive quarter-over-quarter growth. The slightest activity always brings in huge excitement for investors and businesses.

Take, for example, the number of mergers and acquisitions (M&A) currently in the industry. The cannabis industry is seeing a lot of buzz and activity on the M&A front.

An analysis of key investment and M&A trends in the Cannabis Capital Markets by Viridian Capital Advisors, LLC (“VCA”) has shown impressive growth in M&A activities. The company uses its newest addition Viridian Cannabis Deal Tracker, to track and analyze activities in the industry.

VCA – A Leading Cannabis Capital, M&A and Strategic Advisory Firm

VCA has a strong and established reputation in the cannabis advisory space. The company was founded in June 2014 as one of the earliest financial and strategic advisory firms in the cannabis sector, with a team of seasoned investment bankers and analysts who brought capital raise, M&A and advisory transaction experience to the cannabis industry.

The Viridian team has closed approximately $250 million in financings and over $650 million in M&A transactions. The company has performed several dozen strategic advisory, valuation, financial modeling and board development assignments.

Viridian Cannabis Credit Tracker

The Viridian Cannabis Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis and hemp industry. Each week the tracker aggregate and analyzes all closed deals and segments each according to key metrics:

• Industry sector (1 of 12 sectors, from Cultivation to Brands)
• Dollar value of the transaction
• Region in which the deal occurred (country or U.S. state)
• Status of the company announcing the transaction (public versus private)
• Deal structure (equity versus debt)
• Key Deal terms (pricing and valuation)

Capital Raise Activity Booms: 1st Half 2021 vs. 1st Half 2020

A comparison between M&A activities in the 1st half of 2020 to the 1st half of 2021 showed a fourfold growth — 166 M&A transactions last year compared to 39 this year. The figures from the table show there has been more activity in the private sector than the public sector.

President and Founder of Viridian Capital Advisors, Scott Greiper, a well-known expert in the space, has attributed the M&A activity boom to 4 major factors. He gave a breakdown of the factors behind the boom in an exclusive interview with Benzinga.

Predominant Acquirers in the Cannabis Industry

He explained that the predominant acquirer in the cannabis industry over the last 4 years had been the multistate operators (MSOs) who are in business to make acquisitions. The largest multistate operators are public companies.

Those companies, Greiper noted, saw their stock prices go wild from the 2020 November election up to about 3 months ago when the stock started to give up some of the gains.

“The predominant acquirers were more powerful buyers this year because they had very high stock prices. They can use stock as consideration for an acquisition, and because their stock was so high, they were raising more and more equity. They had very healthy balance sheets that they can use to use cash as part of acquisition consideration,” he explained.

Emergence of the Cannabis SPACs

Another contributory factor to the boom was the emergence of the cannabis special purpose acquisition company (SPAC). Over the last 18 months, the industry has had about 20 cannabis SPACs go public in the U.S. and Canada.

On average, those companies raised about $200 million in IPO proceeds. “So, if you do the $200 million across 20 of these cannabis SPACs, it was about $4 billion raised.” Greiper added, “The SPAC is only in business to make an acquisition; they’re not an operating company until they de-SPAC. So, you had $4 billion of what is effectively acquisition capital coming into the marketplace but SPACs have 18 months from the time that the IPO closes to when they have to announce that they have a definitive LOI to make an acquisition.”

This means there is tremendous time pressure sitting on these SPACs to spend the money that they have. The SPAC acquisition capital has brought another set of buyers chasing cannabis companies.

Private Equity Buyers

The 3rd reason is private equity buyers that have come into the cannabis industry. “Note the very low levels compared to the SPACs and the MSOs, but we sold the 1st 2 months of this year 2 California cannabis companies to private equity firms.”

The industry is now starting to see the biggest bucket of capital that has not really been in the industry yet, like private equity, starting to come into the industry not only on the investment side but on the acquisition side. This means more money, acquisitions and competition for deals.

Natural State of Aggregation

The industry, Greiper observed, is undergoing a natural phase consolidation aggregation.

He recounted that in 2014 when Colorado and Washington State became the 1st states to launch adult-use recreational cannabis, which also marked the beginning of the capital markets of the industry, there weren’t a lot of public companies and big constellation brands before then. The industry didn’t also have 40 private equity groups.

Greiper explained that it was when Colorado and Washington State went recreationally legal that the buy-side ― acquirers or investors ― opened the apertures of how big this industry could be. This made it possible for anyone who was 21 and older and had a valid driver’s license to walk into a legal recreational dispensary to buy.

“We’re now 7 years after 2014 and if you look at how other industries have emerged, whether it was electric vehicles, homeland security, artificial intelligence or the internet — usually 5 to 7 years after the sort of launch of these new markets — you start to see a natural aggregation in the industry because there are too many providers selling the same stuff.”

Greiper observed the increased competition in the industry and pressure on pricing. Public companies that are showing good organic growth and healthy balance sheets are aggressively acquiring smaller companies.

More growth for the cannabis industry

Scott Greiper, President and Founder of Viridian Capital Advisors

Results from the 1st half of 2021 show that the industry will continue to be on an upward trajectory.

Greiper explained there is a very high level of LOIs that have been issued by buyers to sellers, which gives a leading indicator that as and if these LOIs turn into definitive purchase agreements, the industry will see continued acquisitions.

“Among the 20 or so SPACs, only about 12 or 13 have actually made an acquisition in de-SPACs that leaves another 7 or 8 with over a $1 billion IPO proceeds that they have to spend in an acquisition — they had that ticking time bomb over their heads so we know that there’s going to be more SPAC acquisition activity through the balance of the year. Between the amount of LOIs in the market and the fact that you have over $1 billion of unspent SPAC IPO money, we don’t see any slowdown on the M&A side,” Greiper said.

Federal Legalization and SAFE Act

There has been a lot of talk on the federal legalization of cannabis. While many believe that is what the industry needs, others hold a contrary view that things may not change on the national level anytime soon.

Viridian Capital does not expect that there will be any change in the federal status of cannabis. “We don’t foresee this changing for a year or 2. We just don’t see it. I know the bill was put forth by Senator Schumer and Senator Booker; it’s not happening.”

Greiper stressed that he is not counting on that to drive continued growth. The industry is already having a record year in terms of revenues, profits, capital and M&A, even though cannabis is not legal nationwide.

However, he was optimistic that the SAFE Banking Act of 2021 would get to a Senate vote this year because the Act provides federal guidance for Federal Deposit Insurance Corporation (FDIC)-insured banks to bank the cannabis industry.

The passage of the SAFE Banking Act, Greiper noted, would be a major lever to more investment, mortgage financing, credit lines, insurance and liquidity coming into the market from big commercial banks.

Photo by Elsa Olofsson on Unsplash

As an expert in the industry, Greiper observed that the cannabis industry is one of the fastest-growing industries in the world. Already, there has been a record increase in stock prices this year which means tremendous gains for cannabis investors and public companies.

Also, there’s been record amounts of capital coming in the industry and from larger and larger pools of capital. There has been a lot of private equity and venture capital coming in couple with record levels of acquisitions.

“If you invest in a private cannabis company, you have a pretty good chance of being acquired and monetizing your equity. The cannabis industry is rapidly becoming the largest consumer products industry in the world. It’s going to be larger than liquor, larger than tobacco and it’s still in an emerging state; it still has a lot of headwinds against it. There is still a good opportunity to come in before the world comes in,” he advised people yet to invest in the cannabis industry.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.