Tier One MSOs Gain Most On SAFE Act Reintroduction

The latest version of the SAFE Banking Act was introduced to the Senate and House on April 26th. In a cannabis market dying for any source of optimism, the introduction sparked initial sharp increases in stock prices. Some gains drifted away by Friday, partially due to Senator Schumer’s pledge to add social justice provisions to the bill. We have learned the hard way not to take any position on the bill’s passage, but we will admit that Schumer’s rhetoric elicited a bit of déjà vu.

• The chart shows the percentage gains in stock price (green line) for the week of April 28th for the top 22 MSOs arranged in order of increasing market capitalization (brown bars.)

• The correlation between stock price gains and market cap is clear: larger companies gained more.

• This is counterintuitive if one takes the stated intent of the SAFE Act at face value. The ACT aims to ease access to bank services, and this increased availability should help smaller companies the most. However, the image of an “all-cash” industry has not been the reality for years, at least not for public cannabis companies. None of the companies on this chart have difficulty obtaining basic bank accounts or services, and to that extent, the SAFE Act would produce modest gains at best. 

• The most significant benefits of the SAFE Act are indirect. Granting a safe harbor for the provision of banking services may lead to increased willingness of banks to custody cannabis equities, and this could lead to greater trading liquidity and more incentives for the senior exchanges to allow listing. It may take some time, but an equivalent of the SAFE Act will eventually lead to up-listings, a much bigger deal for the companies on this chart.  

• We are not surprised that the larger companies faired better. On any shot of optimism, the marginal dollar invested in cannabis gravitates toward bigger, more liquid, and ostensibly safer companies. Moreover, the larger companies stand to gain the most from eventual uplisting. 

• AYR Wellness AYRWF is an outlier: a small market cap with significant gains. AYR could be one of the largest beneficiaries of re-invigorated capital markets activity fostered by renewed cannabis optimism.

• SAFE would doubtlessly help many small private cannabis companies to obtain services and financing. Still, for the companies on this chart, its most significant impact will be to pave the way towards increased liquidity, incremental institutional investment, and uplistings to senior exchanges.

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.