Rescheduling is “not a Panacea to all the problems of the industry” and would not make the issue of oversaturation and lack of investor capital go away, Frank Segall, co-chair of cannabis practice at Blank Rome, told the crowd gathered at the Benzinga Cannabis Capital Conference in Chicago on Tuesday. He was part of the panel, “Consolidation Trends in the Wake of Cannabis Rescheduling: Identifying Winners and Losers.”
While it would impact positively the balance sheets of many operators by eradicating restrictions of Section 280E of the Internal Revenue Code and attracting some capital, the shift of cannabis to Schedule III would not result in big players like Wells Fargo crossing over to the marijuana industry, Segall said.
“Legalization is what they’re mandating for them to cross over,” he added.
Segall, alongside three other experts, joined the panel moderated by Scott Greiper, founder and president at Viridian Capital Advisors, to discuss broader market consolidation trends following cannabis’s shift to Schedule III.
Alongside Segall, Pablo Zuanic, managing partner at Zuanic & Associates LLC; Barbara Webb, tax partner at MGO and Laura Bianchi, co-founder of Bianchi & Brandt discussed which types of companies are positioned to thrive and which are not, as well as how investors can identify solid bets in the new regulatory landscape while avoiding pitfalls in a competitive market.
Zuanic & Associates’ Zuanic said that even though two presidential candidates favor rescheduling and a DEA hearing on the horizon — with signals the policy shift could happen next year — there’s a drop in investor interest in the space. That’s compared to the past four years.
“I think that we are getting all a bit ahead of ourselves in terms of optimism here,” he said.
Zuanic added the reason why consolidation is not taking place is that valuations are depressed in addition to uncertainty around what rescheduling would really bring. He said the main benefit of rescheduling is making 280E go away.
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That said, MGO’s Webb highlighted many cannabis companies are not paying their taxes, which could be counterproductive for operators if cannabis rescheduling takes place. “It’s a temporary survival tactic, but you can’t do that forever,” she said, adding “the IRS eventually catches up.”
Consequences could seriously affect business growth in the long run.
“You might be able to get an installment plan once they do catch up with you,” Webb explained. “However, once on an installment plan, a cannabis business not only have to regularly, never miss a payment pay, but also stay current on your current year’s estimated taxes, which is a huge cash commitment.”
Webb added companies that are going to be “superstars” post-rescheduling are cash flow positive with 280E.
The tactic of not paying taxes will have serious consequences when it comes to M&A activity in the space, Bianchi & Brandt’s Bianchi said. “That’s going to have a drastic effect on M&A in the future because it’s already been an issue,” she said.
Speaking of acquisition targets, Bianchi said some buyers are looking at distressed assets, mainly businesses that have difficulties operationally and are not avoiding paying taxes.
She also said the trend of huge deals is over. “We’re dealing with more creative companies coming together and maybe joint ventures,” Bianchi added.
Zuanic & Associates’ Zuanic said that “there’s too much overlap” in deals where one multi-state operator is buying another one. Instead, he proposes brands as acquisition targets.
Brands are and will be a key point of M&A activity, especially in the scenario where interstate commerce is legal, he continued.
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Photo: Benzinga Cannabis Conference “Consolidation Trends in the Wake of Cannabis Rescheduling: Identifying Winners and Losers,” Photo by Wendy Davis.
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