Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry October 18th - October 22nd, 2021
October 27, 2021 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Transactional Activity: There were five fewer transactions and a $254.3 million lower volume this week than in the prior week. Compared to last year's same week, seven more transactions closed with a $192.8 million higher volume. The average deal size was $21.6 million this week vs. $0.7 million in the same week last year. Overall deal activity was thin, with both equity and debt issuance dominated by a single issue.
Six equity issues were closed for total proceeds of $66 million. Approximately $50 million of the total was funds raised by AYR Strategies through warrant exercises.
Three debt issues closed this week for a total proceed of $128.3 million, led by the $120 million Verano Holdings credit facility upsizing.
Cannabis stocks drifted slightly lower by 0.7% for the week as measured by the AdvisorShares Pure US Cannabis ETF. The ETF is down 45.0% from its February 12th peak and is now at its lowest since October 30, 2020. Year-to-date, cannabis stocks are down 22.1%, while the S&P 500 is up 21.0%.
For the second week, tier-one MSOs were hit the hardest, led Ascend Wellness (CSE: AAWH)(OTCQX: AAWH) (down 9.8%) and TerrAscend (CSE: TER) (down 7.3%).
Big gainers and losers for the week included:
Total capital raised YTD in 2021 of $10.64B is now approximately $.34B lower than the same period in 2019 (the previous peak year); however, US capital raises are far more robust. US equity raises are up by $828M (21%), and US debt raises are up by $1,212M (114%) compared to 2019. Canadian raises are off sharply, with equity raises down 48% and debt down 17%.
Largest Equity Raise: On October 20, 2021, Ayr Wellness, Inc. (CSE: AYR.A)(OTCQX: ARYWF), the sixth-largest MSO by market cap, announced the final results of its September accelerated warrant expiry and incentive program.
- 5.85 million warrants (91%) of the publicly held warrants exercised were exercised for cash and received the benefit of a C$.75 per share incentive. The incentive equates to a 6.5% discount on the exercise price. The company is cleaning up its cap table and removing a potential overhead of in-the-money warrants.
- Ayr received approximately US$49.5 million in cash from the exercise price payments.
- The warrants were issued in December 2017 and had an original expiry date in May 2024. They became subject to the acceleration clause in the agreement in November 2020.
- The market was concerned about the potential impact of shares received through warrant exercised being dumped and pressuring prices. Ayr shares have performed a bit worse than the market over the last several weeks, and this probably does have something to do with it.
- Viridian Capital Equity research believes Ayr is the best pick among the MSOs and our Viridian Capital Graph of the Week from last week copied below demonstrates the argument well. Ayr has the lowest valuation multiples of the group, but the highest 2021-2023 expected revenue growth.
- Ayr management believes its stock is undervalued. On August 25, 2021, the company's board approved a plan to repurchase up to 5% of outstanding subordinated shares (the maximum amount allowed for CSE-listed companies). Ayr is the first major MSO to announce a buyback program. We believe other companies with low multiples should consider a similar move as equity prices continue to edge down and debt pricing becomes more attractive.
Public Company Listings: Seven of the nine companies that raised capital this week were public. All seven trade in Canada ( five on CSE and two on TSX). Similarly, all seven trade in the US ( six on OTC, and one on Nasdaq).
Equity vs. Debt Cap Raises: Equity accounted for six of the nine raises and 34.0% of capital raised.
Largest and Most Interesting Debt Deal: On October 20, 2021, Verano Holdings Corp. (CSE: VRNO)(OTCQX: VRNOF) announced that it had amended and upsized its senior secured term loan to $250 million, adding an incremental $120 Million. Details of the facility:
- 8.5% interest rate with no equity-linked features.
- 18-month maturity.
- Senior Secured.
- Lead administrative and collateral agent: Chicago Atlantic Advisors, Significant participant; AFC Gamma, Inc.
- Verano has an option for an additional $100 million in term debt on the same terms.
The Verano Deal is illustrative of the declining effective cost of debt for the largest MSOs, which has continued on the downward trajectory we pointed out in our September 6, 2021, Viridian Capital Graph of the Week, updated below.
The reduced cost of debt stands in stark contrast to the reception the group has seen in the equity market, where prices (as indicated by the AdvisorShares Pure US Cannabis ETF) have declined by 45% from their February peaks.
The decline in debt costs results from improvements in issuers' credit quality and the increased presence of well-funded institutional lenders like the participants in the Verano deal noted above.
This week's Viridian Capital Graph of the week (presented below) showed evidence that the market is rationally pricing the credit quality of the MSOs. The graph shows the effective rates of recent transactions against the issuer credit ranking in the Viridian Capital Credit Tracker. (Note this graph only contains data on the companies that have recently completed significant-sized debt issues.)
Below is a more comprehensive look at the credit quality of Verano relative to other public MSOs with over a $750 market cap.
- Verano ranks as the third-best credit of the group based on the Viridian Credit Tracker, consistent with the pricing of its upsized credit facility.
- Verano has the second-lowest debt to market cap and the group's highest analyst consensus 2022 EBITDA margin.
We expect to see continued debt issuance from the MSOs as they fund build-outs of newly acquired licenses and pursue accretive acquisitions.
Cap Raises by Sector: Five of this week's nine capital raises come from Cultivation & Retail.
MERGERS & ACQUISITIONS
Transactional Activity: We tracked only two closed M&A transactions this week, compared to three in the prior-year period. We have chronicled 265 transactions YTD in 2021, compared to 71 in the same period last year. Public companies were the buyers in 85% of 2021 deals YTD compared to 89% in 2020.
There have been 186 US targeted M&A transactions YTD with a record $8.3 Billion in total consideration. Both transaction numbers and total consideration exceed the values recorded in each of the last two full years.
One of the key drivers of the M&A wave has been increased deal sizes, as shown below. Note: $ consideration for non-cultivation targets YTD is approximately 2x all previous full-year amounts.
Largest M&A Deal of the week: On October 18, 2021, Innovative Industrial Properties (NYSE: IIPR), the first and only NYSE listed company focused on the US cannabis industry, closed on the acquisition of a 201,000 sq ft facility in Desert Hot Springs, CA and entered into a long term lease with Gold Flora, LLC.
- The purchase price for the property was $51 million, with a tenant improvement allowance for an additional $9 million.
- The property will be used as a cultivation and processing facility.
- Gold Flora is a fully vertically integrated cannabis operator with cultivation, manufacturing, distribution, and retail.
Another Interesting M&A transaction: On October 19, 2021, High Tide (TSXV: HITI)(Nasdaq: HITI), a US$286M market cap retail-focused Canadian company that also manufactures and sells consumption accessories, closed its previously announced acquisition of Blessed CBD.
- Blessed is a leading online retailer of hemp-derived CBD products in the UK.
- Total consideration included upfront cash payments of US$5.8M and an additional US$6.78M in stock.
- The transaction value represented approximately 2.2x and 4.0x revenues and EBITDA, respectively, for the trailing 12 months ended August 2021.
Public vs. Private: Both of this week's two 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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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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