Debra Borchardt
Cantor Fitzgerald analyst Pablo Zuanic took the temperature of the cannabis M&A (merger and acquisition) landscape. While he thinks the activity will be cooled off for now, he did list his potential targets. The blowup of the Verano and Goodness Growth deal last week seemed to spark the analyst’s decision to see which companies might be potential targets. He still believes the Cresco acquisition of Columbia Care will go forward and close by the end of the year. Despite ranking the companies, Zuanic cautioned that he thinks the M&A market may be on pause for now as companies cross their fingers for some sort of banking relief.
“We think uncertainty around SAFE Plus will probably delay M&A activity until after the lame duck session (i.e., the 118th Congress will be inaugurated on 1/3/23). If SAFE Plus passes, valuations for all US cannabis stocks should go up, and companies with stretched balance sheets may be in a better position to raise new capital,” wrote Zuanic. He continued saying, “We would expect smaller mid-size and smaller operators to be sold eventually, especially if the Biden Administration decides to de-schedule cannabis and Congress passes a comprehensive legalization framework before Nov 2024, with features like interstate commerce and a multi-tiered system.”
Here is how Cantor ranked the potential targets (for the larger MSOs) based on footprint attractiveness and anti-trust friendliness.
■ “Jushi (OTC: JUSHF): It has operations in seven states (stores plus cultivation and production). It has guided for 37 stores as of YE22 (PA 18, VA 5, IL 4, NV 4, CA 3, MA 2, OH 1), and 50 by YE23 (adding six more in IL, 1 in VA, 1 in CA, in MA, 4 in OH). In our view, the two most valuable pieces are the VA license (Northeast region) and the PA retail network. We would think both Curaleaf and Trulieve could be interested in the PA/VA parts (Curaleaf would only face anti-trust issues in IL/MA/OH, and Trulieve only in MA).”
■ “Ascend: It has operations in six states (4 rec: IL, MA, MI, NJ; 2 med: OH, PA), with a total of 28 stores as of mid-August (IL 8; MI 7; PA 6; NJ 3; MA 2; OH 2) plus cultivation and production. It is due to open two more stores in IL (10 is the state cap) and 3 in OH (5 is the cap). With the larger MSOs, Ascend has overlap in four states (IL, MA, NJ, OH), and with Trulieve, it only overlaps in MA (as mentioned before, we do not expect regulator pushback in PA). We only see Trulieve as a potential buyer, but issues facing the largest shareholder may complicate a selling process for now.”
■ “AYR: It has operations in 8 states (5 rec: AZ, IL, MA NJ, NV; 3 med: FL, OH, PA), with 77 stores (as 8/18), 18 cultivation and production sites (1.2mn sq ft in total), and 2,400 employees. We see overlap issues for the larger MSOs (except in AZ/PA), although for Trulieve the only overlap would be in MA (in our view, Trulieve could keep the FL/PA/AZ assets despite overlap, and it would enter IL/NJ/NV/OH). But we think AYR may be too large to be acquired by some of the top MSOs.”
■ “TerrAscend: It has operations in NJ, PA, MD, MI, CA, and Canada. The company is 16% owned by Canopy Growth, contingent on US federal permissibility), and we think that reduces the potential for other bidders. In our view, the NJ/PA parts are the most attractive in the TerrAscend footprint.”
■ “4Front Ventures: It has operations in WA, IL, MI, CA, and MA. In WA, 250 third-party stores carry the company’s brands. It has 2 stores in IL, and it is building cultivation. In MA, it has 3 stores plus cultivation. In CA, it has four cultivation sites. In MI, it has one store in Ann Arbor. Clearly, this is more of a wholesale model, but in the context of the other targets, we view the company footprint as less attractive.”
■ “Goodness Growth: It has operations in five states (MN, NY, NM, MD, AZ) and also plans to develop non-core assets in MA, NV, and Puerto Rico. After the fallout with Verano, we expect the company to merge with someone else, but it may need to reconsider its own valuation appraisal of the NY asset.”
Zuanic said he didn’t rank the less-developed MSO’s or Acreage Holdings due to its arrangement with Canopy Growth.
