By Onofrio Castiglia in Charlottesville and Nate Trela in Denver, with data reporting by Philip Segal in New York
As the coronavirus pandemic ravages the U.S. economy, the M&A market for hemp and cannabis has continued to decline drastically with bankruptcies accelerating, numerous sector experts say.
“There’s been a precipitous decline in the number of deals,” Scott Greiper, president of Viridian Capital Partners (VCA), said of the M&A market throughout the last year.
In Q1 2019, there were 94 M&A deals as tracked by VCA, Greiper said. In Q1 2020, there were 19. In March of 2019 there were 25 deals as tracked by VCA. By March 2020, there were 5.
That tracks with Mergermarket data, which shows there were 73 transactions in the second half of 2019, down from 110 in 1H19. To date in 2020, there have been 27 deals announced in the US. In 2019, total deal value in the space was more than USD 9.2bn. To date in 2020, total deal value has fallen to USD 325m.
COVID-19 has further damaged the valuations of companies in the space, which were already trending downward because of heavy licensing requirements by state governments and overplanting by farmers – resulting in a cannabidiol (CBD) price crash. Cannabidiol, or CBD, is a compound that can be extracted from marijuana or hemp. It’s used as a relaxant applied topically, or as an additive for food and beverage.
The decline in the market valuations has reduced the ability to raise capital. This is particularly problematic in the case of public companies, which account for 90% of all capital raising in the space, Greiper said.
Still, it’s almost exclusively public companies that are buying now, he said. The year-on-year increase in the percentage of transactions in which the acquirer was a public company increased from 62% in March 2019 to 95% in March 2020.
Bankruptcy and consolidation in hemp
The coronavirus has intensified the impact of the CBD price crash, Marty Clemons, director of the North Carolina Industrial Hemp Coalition, said.
According to several experts, a kilo of processed CBD oil in 2014 could fetch $70,000. That same quantity today is being sold for as little as $750.
Asset value in industrial hemp has been so devalued that Kentucky’s GenCanna Global, which had been planning an IPO, filed for Chapter 11 bankruptcy in February.
Joe Hickey, founder of the Kentucky Hemp Growers Cooperative and Halcyon Holdings brand holding company said many companies who were edging toward selling before the virus have been spooked into trying to get out while they can.
Hickey is a long-standing figure in industrial hemp investment and activism, counting Hollywood actor Woody Harrelson among his co-investors. Hickey planned Harrelson’s hemp-planting protest and intentional arrest in Kentucky in 1996.
He said CBD hemp processing companies financed with $6 million or less will be forced to either consolidate or go bankrupt in the near term. Those companies founded on $40 million or more can last 10 months to a year without further investment. For the larger companies, this presents an opportunity to acquire distressed assets and grow quickly.
COVID-19 is hitting vertically integrated companies with retail operations particularly hard, as retail operations are closed in many states, and a lack of clear FDA regulation keeps retailers from advertising online sales on popular social media platforms like Facebook.
Clemons said she expects only about five CBD processors to continue to exist when the wave of bankruptcy and consolidation ends, pointing to well organized firms like Open Book Extracts in Roxboro, North Carolina.
Eric Balshin, CEO and co-founder of Yesterday Wellness, said it was hard to imagine a more disruptive time to have launched the luxury CBD brand. It quickly postponed fund-raising plans and pivoted to online sales, a switch many companies may need to make to survive.
On the side of hemp grain processing for food manufacturing, some larger players also stand to profit, Clemons said, pointing to Carrolton, Kentucky-based hemp ingredients manufacturer Victory Hemp Foods.
The third major use of hemp – fiber processing for textiles and other products – has little investment to speak of in the U.S., Clemons said.
“The long-term viability of the industry depends on fiber and food developing,” Clemons said, noting that some institutions and large companies have been shifting toward sustainable fiber. For example, the North Carolina State University School of Textiles has pivoted to solely sustainable fibers.
Mike Saunders, co-founder of biomass processor Xtracts, agreed, arguing at a panel discussion at the Industrial Hemp Summit in Danville, Virginia in February that state and federal regulators never intended or expected CBD to dominate the industry and turn hemp into “marijuana light.”
Despite the consolidation trend, sources in law and banking said the hemp industry is expected to be a powerhouse (up to USD 15bn) in the U.S. eventually – but the timeline is unclear.
Deals crashing in cannabis
On the cannabis side of things Marc Adesso, capital markets and cannabis attorney at Waller Lansden Dortch & Davis, said states without recreational marijuana laws have helped valuations of some medical cannabis companies, as their retail outlets are considered essential business. But recreational dispensaries in some states are closed and so valuations have gone down with revenue.
Deal making has not stopped altogether, and some companies continue to raise capital, though each case is different, Adesso said. Some companies have rushed to set up to-go windows at their retail outlets and offer delivery services. Companies that have pulled that off successfully have a better chance of getting their M&A deal through.
Valuations are down and deals seem to be drying up, he said, citing the collapse of the Harvest Health deal with Verano Holdings as the primary example.
“There are deals that we are working on that won’t make it through the week,” Adesso said. Because no one can say what sales will look like in 2020, “everyone is hoarding their cash to see what happens.”
There will continue to be abundant distressed assets ripe for rolling-up in the space, Adesso said.
A sector investor said marijuana growers, retailers and processors will be uniquely hard hit by the pandemic because they are ineligible for most of the federal programs authorized under the three phases of coronavirus relief already signed into law because marijuana remains illegal federally.
They likely cannot, for example, access Small Business Administration (SBA) funds, including the Paycheck Protection Program that provides a forgivable loan to small businesses that avoid layoffs. Also, they must provide benefits like sick leave to employees, but likely won’t be eligible for IRS rebated related to those costs that most other companies will receive.
“If a company comes out the other side of this, it’s an incredible sign of strength,” he said. “But the amount of work would be needed to go over the books to understand how they survived – and due diligence is already a unique challenge in this space – will be mind-boggling. I can’t see putting cash into anybody before the end of the year if you aren’t already involved.”
Onofrio Castiglia covers industrial products and services for Mergermarket from Charlottesville, Virginia. He can be reached at [email protected].
Nate Trela covers the energy, mining and cannabis sectors for Mergermarket from Denver. Contact him at [email protected].
Philip Segal is the Head Analyst for Mergermarket – Americas based in New York. He can be reached at [email protected].