Size Does Matter: Cannabis Industry Chart Of The Week

The chart shows valuation multiples EV/2022 Revenues and EV/2022 EBITDA arranged in increasing order of 2022 revenue.  The yellow and green bars show EV/2022 revenue and EV/2022 EBITDA multiples, both of which are measured on the left vertical axis.  The red line shows debt/market cap, and the black line indicates the 2021-2022 revenue growth percent, both of which are measured on the right vertical axis.

• The enormous valuation gap between small companies and large companies is immediately apparent. Companies with projected 2022 revenues of under $100M trade at only .8x revenues and 5.2x EBITDA compared to companies with over $750M of projected 2022 revenue,  which trade at 3.4x revenue and 9.6x EBITDA.

• Revenue growth rates partially explain the gap. The $300-$500M revenue group, which includes Ascend Wellness AAWHAWWH, Columbia Care CCHWCCHWF, Jushi JUSHJUSHF, has the highest projected growth rate (69.3%) most likely due to the aggressive acquisition activity of the group. However, revenue growth rates do not explain the significant jump in multiples between this group and the largest revenue group with over $750M projected 2022 revenues.

• One solid explanation lies in the red line showing debt/ market cap, which declines steadily as revenue increases. (The same trend is seen when Debt/ EBITDA is used as a leverage measure) The smaller companies have higher debt levels relative to their assets' market valuation, making them more risky credits. The market is penalizing the market value of these companies for their higher risk.

• Still another compelling explanation lies in the greater trading liquidity of the larger cap companies. Institutional investors want to be able to buy and sell blocks of stock without unduly affecting prices.  

• We believe the persistent valuation gap is a major driving force behind the consolidation-driven M&A activity we are witnessing.  Smaller companies face a higher cost of capital in both the debt and equity markets and are incented to become part of larger enterprises.  Meanwhile, the most prominent companies, possessing a higher valued currency, find the smaller companies instantly accretive acquisitions due to their higher valued currency.

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The 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 aggregates and analyzes all closed deals and segments each according to key metrics:

• Industry Sector (one 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 vs. Private)

• Deal structure (equity vs. debt)

• Key deal terms (Pricing and Valuation)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.