U.S. blank check firms eyeing cannabis companies are struggling to find suitable targets and many are merging into unrelated industries, as weak after market performance of recent Special Purpose Acquisition Corps listings dent confidence.
Hopes of legalization of recreational use of marijuana in the United States saw public cannabis companies enjoy some of their best gains ever after Democrats gained slim control of both houses of Congress and promised federal reform.
The ensuing frenzy saw 18 cannabis-focused SPACs raising around $3.3 billion by August, with more than half of the amount invested through SPAC mergers. But with Democrats making little progress on their promises, the euphoria has fizzled.
Bankers and investors said cannabis SPACs that have yet to finalize deals could see negotiations run into trouble. HERBL, a California-based distributor faced a cut to its valuation in recent months during merger talks with BGP Acquisition Corp, Reuters reported in August.
While a global SPAC boom that started last year has calmed and such vehicles are struggling regardless of their target industries, cannabis-focused blank checks have been hit particularly hard.
All but one weed company listed in the United States through SPACs since 2020 are trading below the $10 per share IPO price. By comparison, 46.5% of SPACs overall are trading higher since their mergers, according to SPAC data provider BoardroomAlpha.
"Share price is incredibly important - it's the optic that investors look at - but it's not the end all, be all," said Joe Caltabiano, founder of Choice Consolidation Corp. "Where it becomes a problem is if you ultimately do need additional capital."
Caltabiano, who listed Choice Consolidation in Canada in January, said a "multitude of reasons are making the capital markets tougher today than they have been previously."
Foremost among their problems is the fact that cannabis companies are still unable to list on major U.S. indices because marijuana remains illegal at the federal level, forcing them to list in Canada, where trading volumes are a fraction of the U.S. level.
Shares of U.S.-based cannabis companies are down 11.4% this year after surging 60% in February, based on the AdvisorShares Pure U.S. Cannabis ETF. Meanwhile the MJ ETF, which tracks global pot stocks, is up 5.5% this year.
SPAC sponsors across industries are struggling to raise cash through equity sales in recent months due to a regulatory crackdown, adding to cannabis trading woes.
Caltabiano said he is optimistic for a recovery in equity markets but his SPAC is turning to debt financing.
A scarcity of large enough target companies to meet deal size requirements is also forcing cannabis SPACs to buy into unrelated sectors. Five of 18 such SPACs raised so far have merged into industries unrelated to cannabis, according to Viridian data.
Tuscan Holdings Corp II, another cannabis-focused SPAC, is now looking at merging with a company in the real estate technology sector, two sources told Reuters.
Despite the challenges faced by SPACs and the public markets, private venture capital has remained strong, forcing SPACs to overpay when buying a private company, said Bill Grownley, partner at the law firm Goodwin.
Mercer Park SPAC bought Glass House in April at a 28.8 times the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple, compared to public peers trading at 15.7 times EBITDA on average, according to Viridian.
"The entire VC world is on fire and valuations are very high across the board, whether its cannabis or not. If SPACs do not perform, a ceiling on potential exits has to inevitably affect the valuations in the private market," Grownley said.
"It's just a question of who blinks first."