Cannabis Pubcos: Is it Time to Go Private?
“The definition of insanity is doing the same thing over and over again and expecting different results” Albert Einstein
It’s no secret that cannabis valuations are in the crapper, down ~90% from their Feb 2021 highs and ~38% from April 30 when Rescheduling (major industry news!) was first reported.
Every positive development is met with an initial share bump followed by a disappointing drop.
Rightly or wrongly, cannabis is seen by most investors as a failed industry especially when you compare returns to other trendy sectors like AI.
Not surprisingly, cannabis firms are hoping with bated breath that RIII and SAFER happen in 2024.
Sadly, hope is not a strategy to boost your share price.
It’s time many Pubcos came to the realization that their true market value will not be fully realized till legalization - which won’t happen for at least 5 years.
I understand their initial impetus to go public and the reasons for staying the course.
However, it no longer makes sense for most publicly listed companies for the following reasons:
1. Major capital markets gaps
A lack of liquidity, short sellers, a dearth of institutional capital, poor research coverage and missing custodial services will limit valuation upside till full legalization.
SAFER (depending on what’s passed and when) may help but there is that forlorn hope thing, again. Uplisting is beneficial to a point but has shown to be no remedy for a depressed share price.
2. High cost and stress
Pubcos pay millions in regulatory and professional services fees plus expend considerable IR and management effort. Your brand and CEO frequently get pummelled by disgruntled retail investors and shit-talking online commentators. Finally, the disclosure requirements and scrutiny are not to every firm’s liking.
3. Equity market headwinds
Persistently high interest rates are dampening valuations, constraining M&A activity, constricting risk capital and introducing serious downside market risk. IPOs for plant-touching firms remain out of the question.
Greener pastures don’t exist in weed-friendly markets such as Germany. The Deutsche Börse CEO called the Frankfurt Stock Market ‘A Junk Shop’ Its DAX index is trading at a record 25% discount to the US S&P 500.
4. Other financing options are available
Companies don’t need the public markets to raise capital. There is lots of available debt funding plus copious amounts of dry powder sitting with private funders.
Cannabis leaders, it’s time to accept a sad reality: your share price is unlikely to appreciably rise without legalization. Buybacks might help but they are not a long-term panacea.
For Pubcos with market caps below $100M, the juice may no longer be worth the squeeze; you have better things to do with your money, time and sanity.
#pubcos #publicmarkets #privatecompanies #capitalmarkets