Merger and acquisition activity in the cannabis industry is lit this year. So far in 2018, Viridian Capital reports that there have been 106 public and 26 private M&A deals in the cannabis industry for a total of 132 deals for the week ending June 8. Compare this to only 73 deals for the same time period for 2017 – an increase of 80%.
Cultivation and retail accounted for the most deals made, while the investment sector came in second and infused products & extracts were the third most popular sectors for deals.
“It seems to be a land grab based on valuations,” said Joe Hodas, COO of General Cannabis (CANN). Some of the companies are putting up big numbers like MedMen (with a billion dollar valuation) that is leaving microcaps behind.”
The smaller companies are trying to compete with a market that is quickly leaving the small caps behind. Canopy Growth (CGC) is the leader in Canadian medical marijuana with a 15% market share according to a new report from Stifel. Aurora Cannabis (ACBFF) is acquiring MedReleaf and that is making them almost an equal player to Canopy. This means that two companies will own a third of the market for medical marijuana in Canada.
Looking ahead to the recreational market, the two leaders have signed supply agreements that would give them 46% market share. “The report said, “The consolidation in the category that would support a thesis of an oligopoly like structure prevailing that could benefit first movers and the category leaders.”
Hodas said General Cannabis is one of those companies that continues to look at acquiring microcaps. “We’re able to be flexible and opportunistic. We do a pretty aggressive due diligence and we bring valuations back in line with reality.” He said there is tremendous opportunity to acquire many smaller companies that started life at the beginning of the legalization effort a few years ago.
“The founders are tired and they are running out of money,” he said. “We provide some cash and liquidity and help them move the ball forward.” Some of the reasons why these companies make themselves so available for acquisition is that they underestimate the amount of capital and time to return money on investment and debt.
Hodas also noted that companies needed to have the right leadership in place and mentioned the implosion of wholesale cannabis broker Tradiv. Hodas was referring to Tradiv closing shop following the companies’ CEO admission of talking to God while tripping on acid in Alaska and in the process, investors lost their money on the investment.
Of course, Tradiv isn’t the only cannabis company that has flamed out. Hodas left the booming Smashburger franchise to join cannabis beverage company Dixie Elixirs. Dixie grabbed early attention in the cannabis product world and was expected to be a brand leader, but the company faced several challenges in 2017. Both Hodas and CEO Tripp Keber left the company, which recently secured new funding and licensing deals. “I hope Dixie succeeds and frankly I have equity in it,” said Hodas.
Many small companies see the valuations of much larger companies and feel they too should be awarded these outsize valuations. “We talk to companies that aren’t predicting crazy numbers and are back down to earth,” Hodas said. “The biggest issue with the industry and microcaps companies is they don’t have good proforma spreadsheets.”
This complaint was recently echoed by Emily Paxhia of Poseidon Asset Management. However, she said that as the industry has matured, the small companies are becoming better prepared with their business documents. The weak spot that she has noticed is those small companies are good at getting started, but then management struggles at the growth stage. “I find I am often stepping into companies that we’ve invested in,” she said.
Tahira Rehmatullah of Managing Director at Hypur Ventures and CFO of MTech Acquisition agrees with Paxhia and said that she is also having to give hands-on help when she invests in small companies. “The CEO’s are doing everything themselves and that isn’t a roadmap for success,” she said.
Still, spreadsheets and management challenges haven’t kept these small cannabis companies from attracting the attention of investors or acquirors. The “Green Rush” is alive and active and while the unicorns may be getting all the attention, the microcaps are still in the game.