Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry August 23rd - August 27th, 2021
September 1, 2021 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
- Transactional Activity: There were five more capital raises and a $199.9 million higher volume this week than in the prior week. Compared to last year's same week, five more transactions closed with a $267.8 million higher volume. The average deal size was $34.1 million this week vs. $9.7 million in the same week last year.
- Equity raises were the highest since May, primarily due to the $144M HEXO transaction discussed in more detail below, and the $100M Series C raise by Jane Technologies.
- Cannabis stocks were up 2.6% for the week, according to AdvisorShares Pure U.S. Cannabis ETF.
- Big gainers and losers for the week included:
- Total capital raised YTD in 2021 of $8.69B is now approximately $1.31B lower than the same period in 2019; however, U.S. capital raises are far more robust. U.S. equity raises are up by $647M (19%), and U.S. debt raises are up by $505M (53%) compared to 2019, the previous peak year. Canadian raises are off sharply, with equity raises down 54% and debt down 24%.
- Largest Equity Raise: On August 24, 2021, HEXO (TSX: HEXO)(NASDAQ: HEXO) announced the closing of its previously announced underwritten public offering of 49.0 million units at US$2.95 per unit for gross proceeds of $144.8 million.
- Each Unit includes one common share and one-half share of warrants with a $3.45 exercise price (17% premium) and five-year life.
- We value the warrants at approximately $.31 per unit producing a net share price of $2.64, a 23.25% discount to the pre-announcement price.
- Subsequently, on August 30, HEXO shareholders overwhelmingly approved the Redecan acquisition in which HEXO will pay $400M of cash and issue 69.7M shares. The cash payment will be funded by combining the equity issue discussed above and the proceeds of a previously sold $360M senior convertible notes issue.
- HEXO's stock is down approximately 30% since the announcement of the equity transaction. The graph below shows that HEXO is down more than 60% since the May 28 announcement of the Redecan transaction, significantly worse than the 20% decline of the large L.P. Canadian index (Aurora, Canopy, Cronos, Organigram, Sundial, Tilray, and Village Farms).
- Why is HEXO down so much?
- Investors were surprised by the size of the equity issue. After all, the company's recently raised $360M in convertible debt should have paid the bulk of the $400M required for the Redecan deal. The company's description of the use of proceeds also included "expenditures in relation to the Company's U.S. expansion plans," which conjures images of dead capital to us.
- The Canadian market increasingly resembles a competitive dogfight between desperate, aimless, and cash flow negative competitors,many of which lack observable paths toward profitability. It has become increasingly clear that HEXO can only justify its valuation through substantial revenue increases, which are unlikely to happen without access to the US THC market, a development we believe is years in the future. Furthermore, we are not convinced that Redecan could successfully compete against the likes of Sublime in the U.S. pre-roll market even if they were allowed.
- Meanwhile, investors are still rightfully concerned about HEXO's ability to integrate the acquisitions they have made (Zenabis, 48North, Redecan) without any significant hiccups.
- Perhaps most importantly, we have become more concerned about HEXO's long-term viability. The $360M Redecan converts mature in two years, and they will either convert at a relatively low price of $3.75/ share or need to be refinanced with more dilutive equity issuance if the market will buy HEXO stock at that point. HEXO has an unbroken 15-quarter streak of negative cash flow from operations, and unlike Canopy, HEXO has no sugar daddy to keep it afloat.
- The Viridian Credit Tracker model uses 11 financial and market variables to measure liquidity, leverage, profitability, and size. The model synthesizes these factors to arrive at an overall credit ranking within a peer group. We now rank HEXO as the worst credit quality of all Canadian L.P.s with more than a $200M market cap, narrowly edging Aurora out of the bottom position.
- Public Company Listings: Five of the nine companies that raised capital this week were public. Four trade in Canada (two on the CSE and two on the TSX) and four in the U.S. (three on the OTC and one on Nasdaq).
- Equity vs. Debt Cap Raises: Equity accounted for seven of the nine raises and 91.2% of capital raised.
- Largest Debt Raise: On August 26, 2021, Item 9 Labs (OTCQX: INLB), a vertically integrated Arizona based company, closed a $19 million construction financing loan with Pelorus Fund, a private real estate investment trust
- 16% interest rate with no disclosed equity participation.
- 18-month term.
- Proceeds used to purchase 44 acres of adjacent land next to the existing 19,200 facility in Arizona.
- The initial expansion adds 9,600 sq. ft. for indoor cultivation, 9,600 sq. ft. of lab and packaging, and a 9,600 sq. ft. head house to support the addition of the two 18,000 sq. ft. greenhouses.
- Cap Raises by Sector: Five of this weeks capital raises came from Cultivation & Retail, with one each from Hemp, Consulting Services, Biotech/Pharma, and Software/Media.
MERGERS & ACQUISITIONS
- Transactional Activity: Five M&A transactions were completed this week, compared to one in the prior-year period. We have tracked 217 transactions YTD in 2021, compared to 54 in the same period last year. Public companies were the buyers in 84% of 2021 deals YTD compared to 92% in 2020.
- There have been 147 US targeted M&A transactions YTD with a record $5.5B in total consideration. Both transaction numbers and total consideration exceed the values recorded in each of the last two full years.
- Most Interesting M&A Deal of the week: On August 26th, 2021, M.J. Harvest ("MJHI") (OTCQB: MJHI) completed the acquisition of assets of Oklahoma-based AOK Ventures, which manufactures and sells the Sublime brand of cannabis products in Oklahoma. MJHI is an $8M market cap company whose chief product line, DeBudder Ltd, is used to strip buds off of the stems of a variety of plants, including hemp and cannabis,
- The total consideration of $2.5 million was paid with M.J. Harvest shares valued at their 20 day VWAP plus a note.
- The acquisition includes equipment, trademark licenses, and a cannabis license.
- M.J. Harvest will transfer the license to PPK, one of M.J.'s portfolio companies, which will also hold the operating assets acquired in the transaction.
- MJHI will acquire an additional 15% of PPK through the acquisition, raising its total ownership to 25%
- The acquired operating assets include an industrial kitchen and leased facility in Tulsa, OK, a lease on a processing storage and distribution facility in Oklahoma City, and equipment for the kitchens and vans for delivery.
- PPK will now be the sole and exclusive licensee of the Sublime Brand in Oklahoma.
- PPK is also in the process of expanding into Arizona and South Dakota.
- Other M&A Transactions: GrowGeneration completed its 13th and 14th acquisitions of the year in Washington and California. Terms were not disclosed. There have been 17 U.S. M&A deals in the sector YTD, up from 12, 7, and 0 for the full years of 2018, 2019, and 2020.
- Public vs. Private: All five of this week's acquisitions were made by public companies.
- M&A by Sector: The buyers and sellers in this week's deals were from the following sectors:
The Viridian Cannabis Deal Tracker is a proprietary information service that monitors capital raise and M&Amp;Amp;A activity in the legal cannabis and hemp industry. Each week the Tracker aggregates and analyzed all closed deals and segments each according to key metrics:
- Industry Sector (One of 12 sectors, from Cultivation to Brands)
- Dollar value of the transaction
- Region in which the deal occurred (Country or U.S. State)
- Status of the company announcing the transaction (Public vs. Private)
- Deal structure (Equity vs. Debt)
- Key deal terms (Pricing and Valuation)
The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&Amp;Amp;Amp;A strategy.
Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&Amp;Amp;Amp;A transactions totaling over $45 billion in aggregate value.
*Copyright © 2021 by Viridian Capital Advisors
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About Viridian Capital Advisors, LLC
Viridian Capital Advisors (www.viridianca.com) is a financial and strategic advisory firm dedicated to the cannabis market. We are a data- and market intelligence-driven firm that provides investment, M&Amp;Amp;A, corporate development, and investor relations services to emerging growth companies and qualified investors in the cannabis sector. Our banking practice, through broker-dealer Bradley Woods & Co. Ltd. (Member FINRA/SIPC), provides capital and M&Amp;Amp;A services to fund the growth of our clients, while our advisory practice helps to position and build their businesses. Our team's decades of high level operating and transactional experience on Wall Street in a variety of emerging sectors, allows Viridian to provide comprehensive strategic and financial solutions that assist cannabis enterprises in realizing their full potential.
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