“Capital is flowing with reckless abandon”

By Alex Halperin
Jan 27, 2021
"A state mandated oligopoly" (Photo by Scott Olson/Getty Images)

“Capital is flowing with reckless abandon,” says Stephen Miles, CEO of Chicago-based Sharp Capital Advisors. When’s the last time, he asked rhetorically, that a consumer packaged goods industry could grow to $80B in annual revenue from scratch? 

He’s not the only one to take notice, of course. In recent weeks, numerous multi-state operators (MSOs) have done nine-figure private raises as they look to establish themselves as market leaders in the most promising state markets.  

As a longtime deal advisor specializing in mid-market firms, Miles is well-positioned to watch the action. In an interview with WeedWeek, he discussed how the smartest operators view the market, what the industry wants from Congress, and why brands aren’t (yet) the way to win. 

“Ultimately, the name of the game is to be a vertically integrated player in a protected market,” Miles said.

  • He sees states like New Jersey, Florida, Illinois — a “state-mandated oligopoly” — and Pennsylvania, which cap the total number of licenses, as offering MSOs the most lucrative opportunities. 
  • In limited license states, he said the small number of operators helps keep wholesale prices healthy.
  • The small number of operators available to customers also enables companies to generate revenue before they have well-established brands. Miles predicts brands will start to matter more in coming years as licensing structures loosen.
  • “For companies pursuing capped-license states, “the capital need is almost insatiable,” Miles said. New Jersey alone could see $1B in cannabis infrastructure investment in the coming years.
  • The industry’s capital expenditures, paired with states’ investment in their home-grown regulatory regimes, suggests to Miles and other sophisticated observers, that interstate trade is still a ways off.

With Democrats controlling both houses of Congress and the executive branch, federal cannabis reform looks more likely than it has in decades. What do MSOs want to happen next?

  • MSOs favor “incremental federal legalization,” Miles said. “I also think it’s what they’re going to get.”
  • The idea is that MSOs want policy that will facilitate their growth without exposing them to competition from far larger players in the alcohol, tobacco and pharmaceutical industries. In a few years, the thinking goes, they’ll be better equipped to compete or be acquired at an attractive price.
  • MSO’s current top priority, Miles said, is access to the financial system, which would “reduce the cost of capital and have an enormous impact on the valuation of these businesses,” especially as more private equity firms get canna-curious.
  • The SAFE Banking Act, which passed the U.S. House of Representatives last year, would allow federally chartered banks to serve the cannabis industry. It wouldn’t, however, enable plant-touching companies to list on U.S. stock exchanges or end 280E. Miles thinks future versions of the bill could do either or both.
  • He suggested major MSOs may not be as eager to end industry-hated tax rule 280E as smaller operators, since their ability to manage it better is a competitive advantage.

In this climate, one of Sharp Capital’s focus areas is advising smaller companies that want to sell. It’s a potential growth area, especially in states which don’t cap the number of licenses.

  • In these markets, businesses hold valuable licenses, but they aren’t vertically integrated, struggle with 280E, and are not equipped to compete in a landscape increasingly dominated by bigger players.
  • With the largest operators looking to snap up assets, Miles says the smaller businesses don’t necessarily have the acumen to shop themselves around and drive a hard-bargain with acquirers.
  • The dynamic allows buyers to make offers — say $10M including $5M in the buyers stock — that a seller would be “pretty foolish” to accept. 
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