Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis, CBD and Psychedelics Industry March 27th, 2023 - March 31st, 2023
April 5, 2023 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
CAPITAL RAISES
Two capital raise transactions with total proceeds of $112.2M closed this week. One more transaction closed than last week, and volume was up by $111.3M. Two fewer transactions closed than the previous year, but the volume increased by $106.4M. This week's average deal size was $56.1 compared to $1.5M last year.
Cannabis capital raises are off to a multi-year low. Only $658.07M closed through the first thirteen weeks of the year compared to $1,213.61M last year.
Debt represents 59.2% of total capital raised, down from the 61.6% registered in 2022 but higher than in any other comparable period back to 2018.
Public companies have raised only 54.7% of total capital YTD, down from 76.9% last year.
Two capital raise transactions with total proceeds of $112.2M closed this week. One more transaction closed than last week, and volume was up by $111.3M. Two fewer transactions closed than the previous year, but the volume increased by $106.4M. This week's average deal size was $56.1 compared to $1.5M last year.
Cannabis capital raises are off to a multi-year low. Only $658.07M closed through the first thirteen weeks of the year compared to $1,213.61M last year.
Debt represents 59.2% of total capital raised, down from the 61.6% registered in 2022 but higher than in any other comparable period back to 2018.
Public companies have raised only 54.7% of total capital YTD, down from 76.9% last year.
Two capital raise transactions with total proceeds of $112.2M closed this week. One more transaction closed than last week, and volume was up by $111.3M. Two fewer transactions closed than the previous year, but the volume increased by $106.4M. This week's average deal size was $56.1 compared to $1.5M last year.
Cannabis capital raises are off to a multi-year low. Only $658.07M closed through the first thirteen weeks of the year compared to $1,213.61M last year.
Debt represents 59.2% of total capital raised, down from the 61.6% registered in 2022 but higher than in any other comparable period back to 2018.
Public companies have raised only 54.7% of total capital YTD, down from 76.9% last year.
Cannabis equities (as measured by the MSOS ETF) were down 2.23% for the week, and most of the companies we track are trading near their 52-week lows.
VIRIDIAN INSIGHTS
Oil Shock? What Oil Shock? The market shrugged off the unexpected Saudi move to reduce oil production (and increase oil prices), with the S&P500 down less than 1% on the news. Increased energy costs hit indoor cultivators hard, resulting in more significant declines for the MSOs. The move may further complicate Jay Powell's efforts to control inflation and could be the surprise that finally kicks off the most anticipated recession in history. Stay tuned.
The banking crisis has turned into the death of 1000 cuts as bank deposits continue leaking out of the banking system. Bank deposits haven't proven to be as "sticky" as in the past. The conundrum facing banks is seen in the 3-month/10-year curve inversion unmatched in the last 20 years. The curve shows that traditional bank lending becomes unprofitable if banks match money market yields on their deposits. This is one of the reasons that an inverted curve is a good recession predictor.
Earnings releases are mainly over, and, as usual, we focus more on revisions of earnings estimates than on beats or misses. The chart below shows the percentage change in consensus analysts' estimates of 2023 EBITDA. The picture isn't a pretty one. Eight out of 19 companies had greater than 10% downward revisions in the month. Only one company on the chart, Acreage (ACRDF: OTC), had an upward revision. Another standout was Glass House Brands, which is not pictured, but swung from an expected loss to a positive expected 2023 EBITDA.
YTD Returns by Public Company Category
All three tiers of U.S. MSOs now have YTD negative returns, and the large Canadian LPs and Tier one U.S. MSOs are the two worst-performing categories. Nine of our eleven categories are now showing YTD losses.
Best and Worst Performers of the last week and YTD
The trading pattern of winners vs. losers features high-volatility reversion to the mean. The top two winners this week, Auxly (XLY: TSX) and Stem Holdings (STMH-OTC), both up more than 25%, were the top two losers last week, down by similar percentages. Similarly, Lowell Farms (LOWL: CSE), this week's biggest loser, down by 36%, was last week's biggest gainer by a similar percentage. Does any of this mean anything? Probably not much since each of these companies is trading like an out-of-the-money option.
On the other hand, the Parent Company (GRAMF: OTC) has been down more than 20% for two weeks in a row.
Goodness Growth (GDNS: CSE) is a new name on our losers list, down 21% on two pieces of financing news. One was that they granted Chicago Atlantic (REFI: Nasdaq) 15m shares worth approximately $1.65M as a fee to amend their credit agreement, removing amortizations and extending the maturity by one year, a hefty fee for a one-year extension! Secondly, GDNS announced that it was in talks with an affiliate of REFI on a $10M senior secured convertible note with a 12% coupon (including 6% in PIK) and three-year maturity. The deal is expected to include warrants to purchase 6.25M shares. Details about the conversion premium and exercise premium were not available. The table below shows the effective cost of the notes depending on the conversion premiums and warrant exercise premiums. Note that the figures below do not consider any OID or fees that will likely increase the effective cost. The cost depends mainly on the conversion premium because the implied warrant coverage is less than 10% for most warrant exercise prices.
EQUITY RAISES
On March 31, 2023, Green Tank Technologies (Private), a technology company specializing in the design, development, and manufacture of vaporization hardware and atomization technology, closed a $12.2M Series B funding round.
- The funding will be used to launch the company's exclusive technology later in the year. The technology caters to diverse markets beyond cannabis.
- Investors included Organigram Holdings and a strategic investor group.
Public vs. Private Raises:
Both capital raising companies this week were private.
Equity vs. Debt Cap Raises:
Equity accounted for 10.8% of the capital raises this week.
DEBT RAISES
Debt accounted for 87% of trailing 4-week capital raises propelled upward by the $100M Madison Sweet Leaf raise, the second largest debt deal YTD. We expect this ratio to be volatile because of the limited capital raise activity. With cannabis stocks trading at or near their 52-week lows, we expect debt to continue to account for more than 50% of capital raises. Since year-end, debt costs have significantly increased because of higher treasury rates and risk spreads. We expect continued increases in equity-linked structures.
The Week's Largest Debt Issues
On March 30, 2023, Sweet Leaf Madison Capital (Private), a provider of equipment financing, real estate loans, and senior secured term loans to middle market cannabis companies, closed a $100M Senior Secured debt financing.
The investor was a "global institutional special situations asset manager." Our long-held thesis is that cannabis lenders provide attractive entry points for institutional lenders to enter the cannabis market without the reputational risk/ legal risk of direct lending. Institutional lenders can obtain greater than traditional BDC portfolio credit spreads with relatively low risk.
We do not have direct visibility into the Sweet Leaf portfolio. Still, based on the public companies in the space, such as Chicago Atlantic (REFI: Nasdaq), we expect to see IRRs in the mid-20 % range from a middle-market cannabis lending portfolio.
Cannabis lenders have attracted around $2.8B of capital over the last several years, and 2023 is on a pace to hit about $400M for the whole year.
MERGERS & ACQUISITIONS
Three M&A transactions closed this week for $73.8M compared to three transactions for $474.0M in the prior year.
Thirty-five transactions totaling $815.6M have closed YTD, compared to sixty transactions for $2,506.03M last year.
The 2023 YTD average transaction size of $23.30M is the lowest in recent years.
Major Pending Deals Risk Arb
The Cresco/Columbia deal spread widened by 1360 bp to 75.5% on 3/31/23, returning to near-record levels. A 75.5% arb spread screams skepticism that the agreement will survive as presently structured because that return over a three-month horizon seems too good to be true. If you think this deal will close, as does one noted sell-side analyst we respect, then why wouldn't you try to establish the arb position of being long Columbia and short Cresco?
Valuation Gap
The valuation gap widened to 2.41 on 3/31/23, climbing back towards its 52-week average of 3.04. The valuation gap is the difference between the EV/NTM EBITDA multiple for the largest MSOs and the multiple for the less than $300M market cap group, which are their primary targets.
This measure has been a significant driver of M&A activity since a larger gap creates an opportunity for more accretive transactions. The gap tends to increase in improving markets while declining in retreating markets to the greater trading liquidity of the larger companies. We believe the current gap is understated by the massive illiquidity of cannabis stocks which may not be accurate indicators of the prices at which the entire companies would trade.
The Most Interesting Closed M&A Deal of the Week:
On March 27, 2023, AYR Wellness (AYR.A: CSE)(AYRWF: OTCQX), a top 20 MSO by market cap, announced the closing of its sale of Blue Camo, LLC, which comprises its Arizona assets, to AZ Goat AZ, LLC.
- The total transaction value was approximately $47.5M. AYR will receive $20M in cash and eliminate about $15M of lease liabilities and $22.5M of debt from its books.
- AYR's stock has been punished by market fears surrounding its significant 2024 debt maturities. The sale is vital in improving AYR's liquidity and reducing its debt.
- AYR originally paid $75.4M for Blue Camo in March 2021.
VIEW DEAL TRACKERS
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
Launched in January 2015, and having analyzed more than $60B in deals, the Viridian Cannabis Deal Tracker is a proprietary data service that monitors and analyzes capital raise and M&A activity in the legal cannabis and CBD industries. Each week the Deal Tracker provides proprietary data and market intelligence on transactions, including:
- Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)
- Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A)
- Principals to the Transaction (Issuer/Investor/Lender/Acquirer)
- Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
- Deals by Location of Issuer/Buyer/Seller ( To Track the Flow of Capital and M&A Deals by State and Country)
- Credit Ratings (Leverage and Liquidity Ratios)
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The information contained herein is for informational purposes and is not intended as a research report. It should not be construed as Viridian recommending investment in cannabis companies or as a solicitation to buy or sell any security or engage in a particular investment strategy. Investment in cannabis companies entails substantial risk. Before acting on any information, you should consider whether it is suitable for your particular circumstances and consult all available material, and, if necessary, seek professional advice.
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The above information whether in part or in its entirety neither constitutes an offer nor makes any recommendation to buy or sell any securities.
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.
Marijuana remains illegal under federal law. The federal government does not recognize marijuana to have any medicinal value. Marijuana cultivation, possession, consumption, sales, and distribution are illegal under federal laws and also certain state laws. Investors in cannabis may be subject to law enforcement actions. Please note that there are differences in marijuana laws from one state, county, or city to another. Furthermore there are substantial risks associated with investing in cannabis companies, including, without limitation, changes in applicable laws, rules, and regulations, risks associated with the economic environment, the financing markets, and risks associated with a company's ability to execute on its business plan.
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