A dozen marijuana retail businesses in Washington state are employing an unusual strategy on the mergers and acquisitions front: package their assets together for a combination sale.
In a move that’s being described as “unprecedented,” Seattle-based investment bank GRN Funds is asking $60 million-$70 million for the 12 retail cannabis firms.
The ambitious plan has spurred questions about whether such a strategy can work, particularly after two Washington state cannabis entrepreneurs recently failed to sell their businesses together in a similar – albeit much smaller – fashion.
The plan also faces some hurdles tied to Washington state’s cannabis regulations, a lack of available cash from potential buyers and less-than-optimal deal structures.
GRN Funds CEO Justin Costello – who’s brokering the sale and claims he has spearheaded 80-plus cannabis deals – said the businesses are located throughout Washington state but most are in the Seattle area.
He wouldn’t reveal the retailers’ names because of a nondisclosure agreement.
There’s no secret as to why the retailers are on the market, however.
“They’re just looking to exit out of the industry and enjoy their lives,” Costello said. “That’s the American dream, right? Build something big and sell it or do an acquisition deal and make tens of millions of dollars.”
GRN Funds launched the deal at the beginning of August with a timeline of 60 days from the outset to source the right type of bidders.
To arrive at the $60 million-$70 million valuation, Costello brought in a third party to audit the businesses’ books, then applied industry metrics to reach that dollar amount.
So far, Costello said he’s received multiple offers, though they’re below asking price.
There are a lot of “tire kickers” in the cannabis industry, Costello has learned.
Paul Seaborn – assistant professor of the Business of Marijuana class at the University of Denver – said the sale is “unusual and unprecedented” for the cannabis industry. It’s rare, if not unheard of, to see a sale set up as GRN Funds’ is, he said.
Among the questions Seaborn has about the sale: Are the stores in competition with each other? Are there synergies between them? Is the sum actually greater than the parts?
With the cannabis industry as nascent and fluid as it is, the packaging could simply be seen as a strategy to attract the attention of potential buyers.
However, Costello said it wasn’t his goal to gain attention by bringing together 12 firms.
“Something of this size, we knew it would have headlines,” he added, “but we also knew the deal would support itself.”
‘Unicorns and magic’
The two prominent Washington cannabis business owners who attempted to sell out earlier this year can back up Costello’s claim about tire kickers.
Uncle Ike’s and Main Street Marijuana – both based in Seattle – paired up in January to sell their retail outlets for $50 million but didn’t find suitable buyers.
“Nobody has any real money,” was the takeaway for Ian Eisenberg, owner of Uncle Ike’s.
Ramsey Hamide, owner of Main Street Marijuana, said he and Eisenberg were contacted by roughly 20 different companies in the United States and Canada, but no offers interested them.
“If they were cash, they were too low,” Eisenberg added. “And if the price was right, it was always equity in some kind of startup stock, reverse merger, unicorn, magical thing – which I’m not interested in.”
Two key Washington state requirements also come into play:
- Under the residency requirement, prospective marijuana business owners must prove they’ve lived in the state six months before they apply for a license.
- The state allows each license holder to own only up to five retail shops.
Costello anticipates having to structure any sale around a group of consolidated buyers. For example, one group would buy five of the businesses, another group would purchase five and a third group would acquire two.
“I think as buyers dig into it – especially out-of-state buyers – it’s a pretty complex thing to complete a transaction,” Main Street Marijuana’s Hamide said.
“We wanted a clean, all-cash sale, and that would require somebody with a lot of money that’s a resident of Washington that really had an interest in cannabis. But we weren’t able to find that person.”
Were Main Street Marijuana and Uncle Ike’s simply priced too high? Hamide doesn’t think so.
“We already thought we were selling at a very, very low valuation by the standards of any other industry,” he said.
Another potential hindrance for a combined sale like the one GRN Funds is brokering could be the Trump administration and its anti-cannabis attorney general, Jeff Sessions.
“There’s not a lot of real capital that wants to invest in pot right now,” Eisenberg said. “Especially with the change in administrations. If I was some super-rich, private equity guy, I don’t know if I would want to run the risk of going to jail over making a few extra bucks.”
So what is GRN Funds doing differently in its sale?
Costello said he hasn’t been approached with penny stock deals or reverse-merger proposals because the 12 companies went through 2½ months of due diligence – including underwriting and third-party audits – before launching the sale, first reported by RespectMyRegion.com.
So far he’s had about 150 “serious people” inquire, he said. Costello’s had interest from around the United States as well as Canada and Asia, including inquiries from Singapore and Hong Kong.
He seems most encouraged by working with Washington state-based private hedge funds and equity companies.
“Those are the real people that are your targets,” Costello said.
Before the launch, his firm targeted what he considered applicable buyers.
“We were very surgical about who we approached and how we approached them first before launching them into the open market,” Costello added.
A sale this size could have a major impact on the industry, he said.
“People will see that we’re a big industry and we’re here to stay,” Costello added. “We’re real and it’s possible that businesses in this industry will get in the tens of millions of dollars.”
Bart Schaneman can be reached at email@example.com