Are Stock Buybacks Likely As A Holiday Treat?

With the MSOS ETF down 68% YTD vs. an 18% decline on the S&P, we decided to reexamine the potential for buybacks, recaps, or LBOs. With a recession of unknown magnitude bearing down on us, we don’t think these actions are prudent, but we wanted to let the numbers speak for themselves.

We started with a population of 62 non-financial cannabis-related companies in the Viridian Capital Advisors Value Tracker database with enterprise values over $20M.

For companies with analyst coverage, we used 2023 EBITDA estimates after applying a 10% discount. For non-covered companies, we used an annualized third-quarter EBITDA estimate. We estimated 43% tax rates on EBITDA for 280e-affected companies and 15% for companies not affected by 280e.

Supportable debt was calculated by dividing after-tax EBITDA by an assumed 1.5x coverage rate and then by the assumed interest rate of either 12% or 15%. This process produced debt/EBITDA ratios of 2.5x for 280e affected companies and 3.8x for non-affected companies, values which we believe to be quite conservative. We then subtracted existing debt to get an amount available to repurchase equity. 

The graph shows potential buybacks as a percentage of market cap at either 15% interest rates (blue line) or 12% interest rates.

Only eleven companies have a buyback capacity at 15% rates, and only fourteen at 12%. Most have less than 20% market cap of excess debt capacity. Three companies stand out: C21 investments CXXIF, Vext Science VEXTF, and MariMed MRMD have the ability to repurchase over 40% of their outstanding shares.

Eliminating 280e would make a big difference, but share prices will likely expand more than debt capacity. We don’t see this as a near-term possibility, but Santa may still surprise with a shining new SAFE ACT under the tree. It is that or sugarplums for investors this year it appears. 

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.