A top marijuana CPA says the 'bubble will burst' for weed M&A deals

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A top marijuana CPA says the 'bubble will burst' for weed M&A deals

marijuana

Courtesy of CannTrust

Marijuana companies are on a deal-making binge.

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  • The marijuana industry might be suffering from an M&A bubble - and it's going to burst.
  • "I'm nervous about the valuations out there on the M&A deals," said Mitzi Hollenbeck, a partner at accounting firm Citrin Cooperman. "The numbers don't support it."
  • Hollenbeck leads Citrin Cooperman's cannabis advisory practice. She was speaking at the New York State Society of CPAs "Navigating the Cannabis Industry Conference" in Midtown Manhattan on Tuesday.

A top marijuana industry accountant had a stark warning for the emerging industry: There's an M&A bubble.

"I'm nervous about the valuations out there on the M&A deals," said Mitzi Hollenbeck, a Boston-based partner at accounting firm Citrin Cooperman who leads its cannabis advisory practice. "The numbers don't support it."

Speaking at the New York State Society of CPAs "Navigating the Cannabis Industry Conference" in Midtown Manhattan on Tuesday afternoon, Hollenbeck warned that "we're going to see the bubble burst."

She added that as more state markets open - and investor excitement around the emerging industry ramps up - the bubble will be "artificially propped up" as marijuana companies spend hundreds of millions in cash and stock to build out their geographic presence and fend off competitors.

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Read more: 'My lips are wet, my mouth is watering to get a piece of that': A war is brewing between US and Canadian marijuana companies to claim a $75 billion market

US marijuana companies, known in industry parlance as multi-state operators (MSOs), have gone on acquisition sprees in recent months in a race to capture a market that some Wall Street analysts say could be worth $75 billion in a decade, provided the federal government legalizes marijuana.

These companies, like Acreage Holdings, MedMen, and iAnthus, operate marijuana retailers and cultivation facilities in states where the drug is legal.

In October, the Los Angeles-based MedMen acquired the medical marijuana retailer PharmaCann in an all-stock transaction that valued the combined entity at $682 million.

On the heels of that deal, iAnthus, another multi-state operator, acquired the Toronto-based marijuana company MPX Bioceutical in a transaction valued at $640 million, among other smaller deals that pop up in press releases seemingly every day.

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Read more: Marijuana companies are using a 'backdoor' strategy to tap the public markets - and it's fueling an M&A boom

These M&A deals are fed by a boom in reverse mergers, in which US marijuana companies go public on the Canadian Securities Exchange - where marijuana is federally legal - by buying shell companies that are already publicly traded.

According to data from Dealogic, the number of US companies pursuing reverse mergers in Canada has more than doubled in the past five years, to over 16 this year from just 7 in 2013, with cannabis companies leading the charge.

The US federal government classifies marijuana as an illegal, Schedule I drug, though it's legal in some form in 33 states. Major US stock exchanges won't list companies that sell or cultivate marijuana in the US.

In August, the accounting firm PwC released a report warning that marijuana industry is gripped by a "deal mania," and that the largest marijuana companies are guilty of "moving in too many directions at once."

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"Investors will show little patience for companies that cannot differentiate themselves to win in a crowded market," PwC said.

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