It’s been months since a cannabis company announced a major acquisition in the Midwest, particularly in Illinois, one of the fastest growing cannabis markets in the country. After a year of big acquisitions, where companies bought Illinois dispensaries for $25 million a piece, investors and analysts now think we’re past that high water mark, as the largest cannabis companies buckle down for a bearish economy and a period of depressed cannabis stock prices.
“We’ve heard from large operators who say the valuations private platers want are unrealistic, and they’re just waiting for the valuation of new licenses coming on line. So they’re hedging until that goes down,” said Alex Gastevich of V. Gastevich Investors.
Last year was a booming year for cannabis acquisitions, particularly in Illinois, as every aspiring national multi-state operator vied to purchase dispensaries and one of the state’s twenty cultivation facilities. Multiple deals in 2021 saw Illinois dispensaries going for $25 million a piece. In a state with only 110 dispensary licenses, and a market on course to sell $1.6 billion of legal weed in 2021, an average dispensary was taking in $14 million a year. With those kinds of revenue numbers, a $25 million sale price seemed to make sense, and big MSOs had the cash and stock prices to support it.
But since then, many MSO stock prices have halved, with Curaleaf trading at about a third of its March 2021 price, Green Thumb Industries at about $20, half of its $42 price in March 2021, and Cresco Labs at just under $6, more than half of its price a year ago.
“These companies are all traded on the Canadian stock exchange. It’s notorious for illiquid markets driven by retail investors. Like the bitcoin world. They are not long term investors,” with an interest to hold for a long period of time, says investor Mark Cozzi from CentoVentiCinque.
One big Illinois deal in particular seems to be stuck in neutral: Parallel’s planned acquisition of Windy City Cannabis. Announced in April 2021, the deal was to be for six Illinois dispensaries for $155 million. Since the announcement, Parallel founder Beau Wrigley relinquished his CEO position, the company board announced the creation of a “Strategic Alternatives Committee”, and the company dumped plans to merge with a SPAC operated by music mega-promoter Scooter Braun.
Ups and downs for cannabis company fortunes should be expected and there are quite a few large companies that are still to get their comeuppance, says Morgan Praxhia, co-founder of industry investor with Poseidon Investment Management.
“There’s been a pretty good disconnect from the fundamentals. We overshot a year ago, and now we undershot. Public markets are always correcting to try and find where fair value is,” said Praxhia. “It’s a risk correlation discussion that will correct over time.”
Asked for a status update on Illinois’ regulatory review of Parallel’s acquisition of the Windy City Cannabis licenses, a state spokesman refused to comment, replying, “Any changes to adult use cannabis dispensary license ownership will be reflected in our list of licensed dispensaries.”
With regards to the Windy City dispensary licenses, the state’s list has remained unchanged since March 2021
“I have been very leery of any company in cannabis or any industry to make so many acquisitions and integrate them,” said Cozzi, who worked as a mergers and acquisitions banker before managing private investments. “I saw lots of clients acquire companies and they couldn’t integrate anything and hit the wall. I worry about this all the time. It’s people, systems, accounting, culture, even branding.”
“I think anytime the valuations have come down in the last four years, [if the companies] have been public, the M and A activity decreased significantly. There may be public to public activity because they’re on equal footing,” said Gastevich.