Cannabis Consolidation Continues

You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015.

The transaction is consistent with a theme we have been discussing since 2020, industry consolidation, and follows several other transactions that we think can create value for the acquiring companies.

In New York, it holds one of the original five and existing ten medical cannabis licenses, franchises that will be very valuable in the upcoming adult-use market due to the ability to operate multiple stores as well as to be a producer.

On near-term metrics, the deal might not appear to be attractive, as Verano trades at a much lower multiple of its projected 2022 EBITDA than Goodness Growth does, but, over longer horizons, Verano is likely to create higher returns than Goodness Growth might have done on its own.

Today, the leading companies are generating positive EBITDA in their mature operations and no longer have to pursue speculative M&A.

The deal announced this week follows Verano’s acquisitions announced in Q4 to enter Connecticut, a new geography for the company on the cusp of transitioning from medical to adult-use.

Beyond the desire of large operators to expand into new states and to go deeper in existing states of operation, we think that cost of capital will continue to be a big driver of M&A.

Trulieve certainly changed that narrative to some degree with its acquisition of Harvest, where it was able to work with the regulators in Florida and Pennsylvania to successfully close the transaction.

We expect large public operators to continue to add small private single-state operators, especially in markets that don’t limit the number of licenses held.

One geography that could see increased activity is California, where there has been a hesitancy by large public companies to get more involved due to the regulatory uncertainty and pricing declines.

In fact, data from Hifyre suggests the market share continued to further erode in January for Canopy Growth, HEXO and Tilray, each of which is experiencing sales declines despite the overall market growing.

On the other hand, while we continue to expect that most of the transactions will involve the purchase of private companies, we see the opportunity for several smaller public companies to be acquired as well, especially those with narrowly focused operations, including certain companies in California and Canada.

TerrAscend is a leading North American cannabis operator with vertically integrated operations in Pennsylvania, New Jersey, and California, licensed cultivation and processing operations in Maryland and licensed production in Canada.

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