Projected June Cash Levels are High Suggesting Continuing M&A Acceleration
It’s no secret that 2021 has been a record year for US Cannabis M&A activity and a robust year for US cannabis capital raises.
The graph shows YTD equity raises (dark green bar) and debt capital raises (light green bar) for nine of the largest MSOs. The graph is arranged in order of decreasing market caps from left to right.
The degree to which equity raises have dominated total capital raises is striking, and at the risk of sounding like a broken record, we believe this is likely to change:
Equity multiples have come down from their peak.
Non-dilutive debt has become increasingly available at reasonable terms.
Callable debt with modest prepayment penalties allows for maximum financial flexibility.
Companies would be wise to finance with debt, keep their equity powder dry, and wait for better opportunities to sell equity when legalization prospects coalesce.
The orange line on the graph shows projected June cash balances ($M). We started with beginning of the year cash, added capital raises, subtracted the cash component of both closed and pending acquisitions and added actual free cash flow for Q1 and projected free cash flow for Q2. In every company except Verano, projected mid-year cash balances are higher than beginning of the year levels despite significant capex and acquisition activity. Verano has used nearly 40% cash in its acquisitions YTD, nearly twice as high as the next highest competitor. Verano now seems like a strong candidate for a significant capital raise.
The blue line shows projected mid-year cash balances as a percentage of market cap. Note that the smaller companies in the group, which have been amongst the most aggressive acquirers, are also poised with very strong cash positions.
High cash levels and relative cash levels suggest continued strong M&A and capital spending levels for the remainder of 2021 and beyond.