A data-rich thought piece by New Cannabis Ventures makes an interesting case for using a sum-of-the-parts analysis in valuing cannabis companies with diverse operating segments, as that helps filter out any boosted value that might be otherwise be included by a simple EBITDA analysis that inflates the overall valuation by including non-cannabis operating segments. The piece provides an excellent illustration of an instance in which a graphic identifying the “largest global cannabis companies by revenue” tells only part of the story. The snapshot describing Tilray / Aphria (post-merger) as the largest global cannabis company does not distinguish between cannabis and non-cannabis revenue – a critical distinction for many investors. As more cannabis companies expand not only their footprints, but the nature of their operations from strictly cannabis (marijuana) related, to other ancillary businesses such as pharmaceutical distribution, hemp-infused food and beverages and even merchandizing (think Jay-Z, Snoop Dogg, Tommy Chong and Bob Marley branded products just to name a few), revenue from these non-cannabis operations becomes a major consideration when it comes to business valuation. This is particularly significant for companies with U.S. operations, where the effective tax rate for cannabis vs. non-cannabis revenue may swing like a pendulum. New Cannabis Ventures’ suggestion that using sum-of-the-parts analysis as opposed to a simple EBITDA analysis for valuating cannabis companies that own disparate businesses makes a great deal of sense as the nascent industry matures and expands beyond the mere sale of cannabis products.
RKS thanks Jonathan Robbins, Chair of the Cannabis Practice at Akerman LLP, for this contribution.