Exploring Liquidity And Valuation In US Cannabis Companies

The graph displays enterprise value/consensus 2023 EBITDA, for the 22 analyst-rated U.S. Cultivation & Retail companies in the Viridian Value Tracker database, by size and liquidity level.

The green bars display EV/2023 consensus EBITDA while the yellow bars show the Viridian cash flow adjusted current ratio, calculated by adding annualized free cash flow to current assets in the standard current ratio.

The left side of the graph shows the 12 companies with less than $200 million in market cap, while the bars on the right represent the ten companies with over $200 million. Each group is divided in half based on whether companies had above or below median liquidity ratios.

The graph clearly shows the narrowed valuation gap between small and large cannabis companies we have chronicled in the Deal Tracker. The median multiple for the small companies is now 4.3x compared to 4.7x for the larger companies, whereas this gap was over 500bp when we first did this exercise two years ago. The smaller gap has significant ramifications for the accretiveness of acquisitions. We believe the current gap is understated due to the relative illiquidity of the smaller companies.

Interestingly and counterintuitively, the low-liquidity small companies trade at a higher median multiple than their more liquid counterparts. Furthermore, their liquidity ratio indicates the need for financing or other liquidity events in the next year. Possibly this group is being buoyed by takeover speculation.

As expected, higher liquidity is rewarded with higher valuations within the large company group, but the impact is not nearly as dramatic as we would have expected.

About half of the analyst-rated U.S. Cultivation & Retail companies will need additional financing in the coming year. Yet, the market is not exacting any significant discount for this. Larger and more liquid companies should be garnering a more significant valuation premium.
 

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, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

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.