Marijuana Business Magazine May-June 2020

May-June 2020 | mjbizdaily.com 83 T he cannabis industry was experiencing a major shift in merger and acquisition activity before COVID-19 derailed consolidation strategies. Coronavirus exacerbated concerns about plummeting company valuations and ongoing regulatory hurdles, disheartening already tight- fisted investors wary of funding marijuana shops. Gone are the days when big public cannabis firms snapped up rivals to boost their market footprint. Instead, bargain hunters keen to scoop up valuable properties at a discount are gleaning opportunities from the proliferation of financially distressed companies. “It’s an incredible time to be an investor,” Morgan Paxhia, managing director of San Francisco-based Poseidon Asset Management, told Marijuana Business Daily in March. “It means we’re getting very attractive, rational valuations. We’re able to build another portfolio that can generate some really strong return profiles.” CORONAVIRUS FALLOUT To be sure, the impact of coronavirus has dampened the excitement for some players in the space. The increasing number of consumers losing their jobs, competition from the illicit market and supply-chain disruptions make the current cannabis sector in California impractical to investors, said Rob Hunt, founder and managing member at California-based Linnaea Holdings. “For this reason, we will be watching from the sidelines for the foreseeable future. We do not believe funding new transactions, at a time of global uncertainty such as we have never seen before, would make us responsible stewards of other people’s capital,” Hunt said. M&A activity, already down from previous years, could be limited this year mainly to companies still in a position to search for distressed or struggling businesses with the greatest revenue and expansion opportunities and the fewest red flags. (See chart on page 84.) “We’ll likely see mergers of mediocre equals and perhaps some strategic distressed acquisitions by the very limited number of healthy operators with sufficient cash on their balance sheet,” said Jeff Schultz, partner and general counsel at New York-based investment firm Navy Capital. SWITCHING STRATEGIES Deal making in this new, tougher financial landscape requires companies to develop acquisition strategies and a clear understanding of how a potential deal will be beneficial, experts agreed. Scott Greiper, president and founder of New York City-based cannabis investing firm Viridian Capital Advisors, noted that much of the M&A activity that occurred in the marijuana space during recent years were “land grabs,” where companies looked to boost their portfolios with the acquisition of licensed operators in multiple states and, sometimes, countries. “It was just a land grab to establish as big a portfolio of assets globally as possible—even if those assets were not revenue-producing or losing a ton of money or hadn’t even become operational. The market was supporting that acquisition activity even at a non- accretive, non-strategic level,” Greiper said. “That’s over. The market is not supporting that anymore.” Instead, many companies are being more strategic in their acquisition approaches by thinking through what types of deals could boost revenue, increase market share in a state or region, improve efficiency or offer some other benefit to their portfolios. Some companies looking at distressed business are willing to pick up the assets—equipment, property, licenses, etc.—and leave the underlying entity to avoid legal or financial burdens. “We just want to be opportunistic and buy things way, way under market that are wildly accretive as opposed to just accretive,” said Jason Wild, chair of TerrAscend. The Ontario, Canada- based firm’s portfolio includes cannabis companies in the United States, Canada and Europe. TerrAscend is open to buying assets off a struggling company but has no interest M&A activity within the cannabis industry is occurring at a slower pace than in recent years because of a decline in company valuations and challenges accessing capital. But savvy investors and financially stable players might be well positioned to pick up struggling companies at a discounted price compared to just a few months ago. Here are details about how to conduct an acquisition: • Develop an acquisition strategy that outlines the types of deals that could boost revenue, increase market share in a state or region, improve efficiency or offer some other benefit to your portfolio. • Identify cannabis companies struggling with external factors that are creating short- or midterm cash shortfalls. Vendors that are not well diversified and unable to collect payments from their supply chain might be willing to consider a sale. • Be prepared to go in and help the struggling business either through a cash infusion, slashing expenses or both. • Understand the state and local regulatory environments where the acquisition target operates. Rules vary on how licenses can be transferred from one company to another. Jason Wild

RkJQdWJsaXNoZXIy Nzk0OTI=