A Solid Cannabis Transaction

You’re reading this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news. We no longer send these by email as we did in the past, but we post this and all of the newsletters on our website here.

Friends,

This week, there was some exciting news regarding M&A in the cannabis sector: Verano is buying the Arizona operations and part of the Virginia operations of Cannabist. We thought M&A  for MSOs had died when Cannabist and Cresco Labs terminated their pending merger last July.

M&A in the cannabis industry is challenging due to the fact that it is state-regulated. Some states, like Illinois, Maryland, New Jersey and Pennsylvania, limit the number of stores one operator can have. Others, like Massachusetts, limit the size of the production facilities. Cresco and Cannabist, then Columbia Care, had announced their merger initially in March 2022, and they were working on selling assets to overcome the regulatory barriers. They had announced a potential sale of some to Sean Combs in late 2022.

The deal with Verano will give Cannabist $105 million in cash, debt and stock. $15 million in cash will pay for the two dispensaries, one cultivation facility and one production facility in Arizona. This fits with what the new management team has communicated to investors in terms of focusing on strong positions and potentially exiting more states that don’t impact the financials.

$90 million will be paid for the Virginia operations, consisting of $20 million cash, $40 million in stock and $30 million of a promissory note. Cannabist did not issue a press release, and the Verano release mentioned but did not emphasize that Virginia will still be a market for Cannabist, which had 2 of the 5 licenses.

The state’s five regions are geographical, and Columbia Care was appointed for HSA 5, with Virginia Beach, Norfolk, Chesapeake, Newport News, Hampton and Portsmouth. These are the assets being sold to Verano. Green Leaf Medical, which the company acquired in June 2021, won HSA 4,  with 27 counties that includes the city of Richmond. Columbia Care paid $240 million for Green Leaf, and fortunately $195 million was in stock.

Cannabist has increased a bit since the deal with Verano was announced, but it is still down 45.7% so far in 2024. Since the deal with Cresco was terminated, it has declined almost 42% with Cresco marginally higher:

Since the deal was first announced, it has declined 92%, while Cresco has declined 74%. I think Cannabist is a very attractively valued MSO, trading at less than 4X enterprise value to projected adjusted EBITDA for 2025. This deal will improve its financial position.

What was most interesting to me is that the price they are getting for just a small portion of their overall business exceeded the entire market cap at the time it was announced. While I like the deal, I did reduce my model portfolio position at 420 Investor after the big bounce on Monday. It is not in the index but still a relatively large position. With rescheduling likely ahead, almost all of the MSOs should do better if that happens. I think Cannabist is likely to do a lot better than its peers.

New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most important content from this week:

Exclusives

The Global Cannabis Stock Index Jumps in July

Financial

Hawthorne Gardening Sales Drop 28%

Tilray Brands Q4 Cannabis Business Lifts 13%

Mergers and Acquisitions

Cannabist to Sell Arizona and Virginia Operations to Verano

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Sincerely,

Alan

Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email