- The chart shows the YTD returns on two stock groups normalized for the MSOS ETF return. The green bars represent companies who are ROs in New York, possessing one of the ten original licenses. The orange bars represent companies either entirely in California or highly levered towards California.
- The California group has significantly outperformed the MSOS ETF YTD, whereas the New York group, except Acreage (ACRDF: OTC), had significantly lower performance.
- The divergence relates to disparate regulatory happenings in the two states:
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New York has delayed promulgating cultivation regulations regarding the original license holders pictured in the chart. The delays are likely to translate into a later start date for adult use and a market that will struggle to provide sufficient supply.
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Meanwhile, as discussed in our May 16th Chart of the Week, California is finally getting serious about fixing its cannabis mess. Legislation expected to pass on July 1st will eliminate the $161 per pound cultivation tax and significantly help the state's struggling farmers.
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The Ironic Law of Unintended Consequences:
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California developed its cannabis industry without explicit attention to social equity and made no attempt to keep large competitors from forming and potentially dominating its market. However, over-taxing and over-regulating resulted in a market virtually devoid of the largest MSOs. No one tried to keep them out; they just didn't want to come in. California's illicit market continues to thrive and is ironically likely to remain a crucial part of New York's lagging supply.
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New York is, in many ways, the opposite case. The state has bent over backward to concentrate on social equity, giving preferential treatment to small hemp farmers in granting cultivation licenses. The theory seems to be that by stonewalling the large companies, New York will provide the smaller social equity players a chance to develop. Unfortunately, the system is fatally flawed. The original ten ROs are the only competitors allowed to be fully integrated, and as we have seen in nearly every adult rec market, integration is key to higher profitability.
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Additionally, in the current restrictive capital markets, which are highly unfriendly to undercapitalized start-ups, the only companies able to fund massive new cultivation projects are the MSOs. Sooner or later, New York will have to unleash these larger players or face a chronic undersupply. Finally, New York is repeating California's error in giving municipalities opt-out rights. We have seen how that played out in California. We believe New York is heading towards a market dominated by the MSOs despite its efforts to the contrary. One thing they are likely to have in common is a stubbornly robust illicit market that neither state has a decent plan to address.
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The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:
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Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)
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Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)
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Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)
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Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
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Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)
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Credit Ratings (Leverage and Liquidity Ratios)
Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
Más contenido sobre cannabis en español en El Planteo.
