Capital holders are searching for affordable avenues into the cannabis industry, with many beginning to play the acquisition game.
The pivot toward snapping up small-to-midsize businesses caught in liquidity crises comes as the cannabis industry languishes from various economic headwinds, “driving increased distressed M&A opportunities for the right buyers,” investment research firm Viridian Capital Advisors wrote in a recent report.
“We are hearing more talk of groups assembling pockets of capital to pursue the acquisition of distressed assets,” the firm said. “Much of this is focused on California, but opportunities abound in other developed markets that have been the chief victims of price compression.”
Total U.S. targeted cannabis M&A is down 73.6% over the trailing twelve months, and the first four weeks of 2023 saw an even bigger drop, off nearly 98% from January last year, the firm reported.
Viridian pointed out that many companies – especially larger MSOs – are focusing on retrenchment and concentration on cash flow rather than growth.
AYR Wellness’ (CSE: AYR.A) cancellation of its $55 million dispensary purchase in Chicago this week and Curaleaf Holdings’ (CSE: CURA) exit from three Western states illustrate the new paradigm. The firm also noted that the Cresco Labs (CSE: CL) and Columbia Care (CSE: CCHW) megadeal “hangs in the balance, with the arb spread saying that the deal will likely be canceled or recut.”
Still, Viridian believes that the “rugged operating and financing environment will be healthy for the industry, clearing away those unable to respond to the challenges and strengthening those that took the opportunity to improve their cash-generation capability.”
“It will present once-in-a-lifetime opportunities for investors/companies/acquirers who can discern deep value and assemble distressed assets at deeply discounted prices,” the firm wrote.
Just this week, a Nevada-based portfolio company waded into the legal cannabis and cannabinoid marketplace by announcing a letter of intent to acquire Wyoming-based East West Pharma Group Inc.
ECGI Holdings Inc. (OTC: ECGI), which plans to operate as Elite Cannabis Group, said that it is reorganizing as an “acquisition-oriented corporation” targeting undercapitalized and distressed licensed cannabis assets based in California. The Wednesday deal includes key personnel, intellectual property, and current and future business operations.
The company said it is looking for properties zoned for cannabis and hemp cultivation and processing, as well as companies operating in areas with a shot at nationwide scale.
“This is a key talent and asset acquisition that will expand our network of potential investors through the lead operations team we get as part of the deal,” ECGI CEO Danny Wong wrote in a statement. “East West has extensive knowledge and proprietary technology/processes within the CBD and Eastern medicine field, and we will gain a tremendous base of specialized equipment as well as key personnel that include leaders in the cannabinoid extraction and product manufacturing space.”
Richard Carleton, CEO of the Canadian Stock Exchange, told Green Market Report that this is just the beginning.
“What I can say is that we expect to see a lot of smaller M&A in the cannabis sector as folks with the balance sheet capability are able to acquire a variety of assets at attractive valuations,” he said. “This will be true in the major legal markets like the U.S., Canada, and beyond.”