Cannabis Deal Tracker: Investment and M&Amp;A Activity in the Cannabis Industry December 6th - December 10th, 2021
December 15, 2021 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Transactional Activity: There were three fewer transactions and a $171.7 million lower volume this week than the prior week. Compared to last year's same week, two more transactions closed with a $195.1 million higher volume. The average deal size was $33.3 million this week vs. $1.2 million in the same week last year. Two large deals positively influenced this week's average deal size: the $100M Chicago Atlantic IPO and the $93.1 private placement of Senior Convertible Notes by Schwazze.
Like, last week, issuance this week was highly concentrated in a few larger deals. The two transactions above represented 94% of the equity raised and 100% of debt raised, respectively.
We see capital raises continuing to tilt towards debt as stock prices hit new lows and companies are loathe to issue stock at the bottom while hope of banking reform is still in the air.
We continue to advise corporations to lean towards short-term or callable debt as a financing source. The spreads to treasuries look enormous, and capital providers will want to be paid a bit extra for doing the work on short maturity paper, but the optionality is well worth it. Last week, we lauded Gage for pursuing exactly this strategy - paying up for short maturity and lack of equity linkage. Still, some companies are choosing to go in the opposite direction. The Schwazze deal closed this week is a five-year, low premium convert, with high coupon and OID, an unfortunate mix that turns out to be quite expensive.
Total capital raised YTD in 2021 of $12.0B is now approximately $2.0B lower than the same period in 2018 (the previous peak year). Results continue to be quite different between the U.S. and Canada. U.S. equity raises are up by $2.0B (62%), and U.S. debt raises are up by $2.7 (673%) compared to 2018. Meanwhile, Canadian equity raises are down $5.9B (81%), and debt raises are down $288M (14%.) Capital raises from the rest of the world are down sharply (81%).
Cap Raises by Sector: Companies raising capital this week came from a diverse list of sectors.
Cannabis stocks were down modestly last week, with the AdvisorShares Pure U.S. Cannabis ETF off 1.62%. Year-to-date, cannabis stocks are down 28.6%, while the S&P 500 is up 25.5%
Issuance was dominated by the $100M IPO of Chicago Atlantic.
Big gainers and losers for the week included:
Largest Equity Raise: On December 10, 2021, Chicago Atlantic Real Estate Finance (Nasdaq: REFI) closed its initial public offering of 6.25M shares at $16.00 per share for total gross proceeds of $100M.
As of November 30, 2021, REFI had originated and closed 30 loans totaling approximately $318.3, and it was committed to fund $120M in additional loans.
The company is in the process of evaluating approximately 45 other loans.
The IPO values REFI at an enterprise value of $292 million and an EV/book asset of 2.28x, a modest premium to AFC Gamma (1.25x) and NewLake Capital (1.47x), two similar companies that also did IPOs this year.
The chart below shows the relative valuations of the five companies we track in the U.S. real estate sector with more than a $25M market cap.
The companies in this list have been aggressive lenders to the cannabis industry, enjoying attractive lending spreads on secured debt.
Public Company Listings: Five of the six companies that raised capital this week were public. Three trade in Canada on CSE and one on TSX), and five in the U.S. (four on OTC and one on Nasdaq).
Equity vs. Debt Cap Raises: Equity accounted for five raises and 53.4% of capital raised.
Only one debt transaction closed this week, but as the chart below shows, debt has continued to represent more than 50% of capital raised on a monthly moving average basis. We think this trend is likely to continue pending any real headway on the safe act or other banking reform.
The top U.S. MSOs are firmly EBITDA positive and continue to be under-levered.
Large, publicly-traded, well-funded debt investors are in a race to build high-coupon books before the radical tightening of spreads likely to follow legalization. Examples include this week's $100M IPO by Chicago Atlantic and last week's $125M debt funding by Bespoke Financial.
Largest and Most Interesting Debt Deal: On December 7, Denver-based SSO Schwazze (OTC: SHWZ) closed its $93M proceeds senior converting note.
The terms of the debt are a bit unusual, and we don't think the company got good execution. We have advised companies to stay short in duration and give up higher rates to minimize warrant coverage and other equity linkages. Or, if necessary, companies should be willing to give higher warrant coverage in exchange for higher conversion premiums. Schwazze got the worst of all of this: High coupon, low conversion premium, 100% coverage, high prepayment penalties, and an OID thrown in on top!
- Five-year maturity
- Original issue discount of 2% (an additional prepayment disincentive)
- Secured by a first lien on all unencumbered assets and a 2nd lien on any assets already pledged.
- Convertible at $2.24 per share (7.7% premium)
- 9% cash interest with an additional 4% PIK interest
- Make whole call premiums equal to the present value of remaining interest payments
Last week, when we previewed this deal, the conversion price had not yet been set, and we estimated a 19.2% effective cost. The conversion price was set at a smaller premium, increasing the deal's effective cost to 21.64%
We continue to think Schwazze is a significantly better credit than is demonstrated by this deal.
Most expensive Debt Deal: On December 15, 2021, Curaleaf Holdings (CSE: CURL) (OTCQB: CURLF), the world's largest market cap cannabis company, announced the private placement of a $425M Senior Secured Note.
- Coupon 8%
- Five-year maturity
- No OID, No Warrants, No convertibility
The table below (arranged in chronological order) displays the most significant debt transactions completed in U.S. cannabis history.
The Curaleaf offering is the largest debt deal ever completed by U.S. MSO.
Larger transactions are becoming more popular because they cater to the institutional investors entering the market looking for more liquidity. There have been fourteen debt transactions over $100M, and eleven have closed since December 2020.
The trend in effective costs for these issues is steeply downward. Curaleaf ties Trulieve as the lowest effective cost among the large deals. There is still significant room for further tightening, however. The Curaleaf issue, at 8%, represents a spread of 679 basis points over the five-year treasury, corresponding closely to the Bank of America CCC index. The BofA single B index is approximately 300 basis points tighter, demonstrating that Curaleaf might expect to do a 5-year deal at 5% if it was viewed as a single B high yield bond. (We rank it as the # 3 MSO credit behind GTI and Trulieve but believe it would garner a BB rating if federally legal)
The upper tier of MSOs no longer needs equity-linked features in their transactions. Early in cannabis financing, almost every transaction had convertibility or heavy warrant coverage because the "debt" was actually equity, as most companies had negative EBITDA. The top-tier MSOs are now solidly EBITDA positive and would be cash positive if not growing at rapid rates.
- The debt market is as bifurcated as the equity market. We have consistently pointed out the enormous valuation metric spread between the largest MSOs and everyone else, and the same phenomenon is apparent in the debt market.
- A demonstration of this gap appears in the graph below. Dollar weighted average effective cost of cannabis debt spiked upward in the first half of December 2021 despite the record-setting Curaleaf placement. The $93M Schwazze deal at an effective cost of 21.6% skewed the average upwards to 10.44%.
- We believe more large debt transactions will be hitting the market as astute financial officers keep their equity powder dry, awaiting a catalyst for better equity pricing. The difference between the Curaleaf and the Schwazze deals demonstrates that the cannabis debt market has not fully matured. We expect to see reduced effective costs for lower-tiered credits as they show positive EBITDA and solid business strategies.
MERGERS & ACQUISITIONS
Transactional Activity: Three M&A transactions closed this week, compared to six in the prior year. We have tracked 302 transactions YTD in 2021, compared to 85 in the same period last year. Public companies were the buyers in 86% of 2021 deals YTD compared to 90% in 2020.
There have been 204 US targeted M&A transactions YTD with a record $10.0 Billion in total consideration. Both transaction numbers and total consideration exceed the values recorded in each of the last two full years.
An essential driver of the acceleration we are witnessing in U.S. M&A is the continuing valuation gap we have discussed between the most prominent companies and everyone else. Cultivation & Retail companies with over $750M in projected 2022 revenues are now trading at a median of 8.48x 2022 consensus EBITDA. In contrast, companies with less than $300M projected 2022 revenues are trading at a median of 4.27x 2022 EBITDA. This near-arbitrage makes almost every acquisition by large MSOs accretive on an EBITDA per share basis.
Most Interesting M&A Deal of the week: On December 8, 2021, Tilray Inc. (Nasdaq: TLRY) closed its acquisition of the Double Diamond Distillery in Breckenridge, Co.
- Total consideration of $102.9M was paid in 11.23M Tilray's Class 2 common shares.
- Double Diamond is believed to have approximately $20 million in 2021 revenues, and the purchase price would represent a 5.1x revenue multiple. The price seems full for a small Colorado property. Tilray expects the acquisition to be EBITDA accretive
- Tilray believes Double Diamond can become a hub for THC beverage production once U.S. legalization occurs.
- We frankly do not understand the logic of this deal. It is too small to move the needle for Tilray, and it seems like this is likely to be dead money for years, similar to Tilray's MedMen investment.
- Perhaps if the distillery came with a ski chalet?
Public vs. Private: All seven 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;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;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;Amp;A transactions totaling over $45 billion in aggregate value.
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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;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;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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