Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry September 12th, 2022 – September 16th, 2022
September 21, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Four capital raise transactions totaling $25.5M closed this week, one more transaction and an $8.8M higher volume than last week. Three fewer transactions closed than the previous year, and volume declined by $5.2M. This week’s average deal size was $6.4M compared to $4.4M last year.
Cannabis capital raises are off 64.5% YTD.
Total Equity issuance is off 75.4%, and total debt issuance is down 42.8%.
U.S. debt is down only 24.0%, while Canadian debt is down a more significant 80.6%.
At 54.4% of total capital raised, debt remains the highest in history for comparable periods.
Public companies accounted for 74.6% of total financing YTD, down from 83.4% in 2021.
The graph below shows that U.S. activity dominated capital raises for the first thirty-six weeks of 2022, with 72.6% of all capital raised.
The U.S. Cultivation & Retail sector has experienced the sharpest changes in capital raise activity
Total capital raised is down 67.0%, but equity capital raised is down approximately 96%.
Debt financing is down 21.6% YTD and accounts for approximately 93% of all capital raised; private companies raised a record 35% of it.
62.8% of total capital raises YTD were completed by public companies compared to 81.6% in 2021.
In 2022, there have been no equity deals above $25M!
Cannabis stock prices (measured by the MSOS ETF) were down 12.06% from last week.
The ETF is down 57.0% YTD compared to an 18.7% decline in the S&P 500.
We continue to believe that a recession is likely in 2023. Depending on how steadfast the FED is in the inflation fight, we could end up with anything from stagflation to a fundamental economic contraction. The FED’s raising of rates is only one aspect of the “pain” Powell spoke about in his recent speech. Quantitative tightening will remove the juice that has supported nearly every asset market over the last five years. Its impact could be more significant than the fed funds rate increases.
The graph below shows that the inversion of the yield curve has deepened in the last week. The past six recessions have been preceded by a yield curve inversion, generally with a lag of around six months. In each case, the yield curve steepened sharply just before the onset of the recession, typically because the FED reverses course and begins to cut rates.
The mix of secular and cyclical trends, including commodification-related wholesale price declines, inflationary cost increases, and a strained consumer, all point to the potential for significant further reductions in cannabis margins. The graph below shows the 37% reduction in EBITDA estimates for 2023 compared to a 23% reduction in revenue for the top 15 MSOs. The widening gap on the chart represents reduced margins.
Despite the issues discussed above, we continue to believe that SAFE+ is likely to be passed at year-end. The indirect effects of increased liquidity, greater institutional investor participation, and eventual uplistings will be greater than the direct impacts of banking reform, at least for the top public companies. Still, smaller publics and privates will see reduced capital costs, better banking access, and other benefits. Prices will likely be range-bound over the next several months until after the midterms.
YTD Returns by Public Company Category
U.S. Tier 1 companies declined relative to large Canadian LPs this week in the only significant change in our rankings. The EV/NTM Revenue Multiples graph shows that the U.S. Tier 1 continues to trade at higher revenue multiples, but the spread has contracted.
Best and Worst Performers of the last week and YTD
Stem Holdings (STMH: OTC) was the week’s best performer, up 25.48% on extremely light volume. We saw no news to account for the rally.
Cansortium (CNTMF: OTC) was the week’s worst performer, down 24.22% in what appears to be a reversion to the mean after its market-beating 26% gain last week.
The Week’s Largest Equity Transaction:
On September 12, 2022, Bright Green Corp. (BRXX: Nasdaq), a company operating under a Memorandum of Understanding with the DEA to produce and sell federally legal cannabis, announced the closing of a PIPE issuance of units for gross proceeds of approximately $10M
9.52MM units were sold for $1.05 per unit.
Each unit included one common share and one share in warrants struck at $1.05 (0% premium) with a 5-year maturity. The zero premium, high coverage, and extended maturity of the warrant package make it worth $.336 per unit for a net discount of 32.0%.
The unit net price was 57.5% below the preannouncement price, a steep discount considering that the issue only increased the share count by 6.4%.
Bright Green is conditionally authorized to sell cannabis commercially for research and manufacturing purposes, export cannabis for international research, and sell cannabis to DEA-registered pharmaceutical companies to produce cannabis products and medications. The company plans to focus on developing strains with high content of CBN and CBG cannabinoids and sell cannabis-derived CBN and CBG to consumers when permitted by federal law.
Bright Green is embarking on an ambitious $297.7M capital spending program, of which $223.4M and $60M will be spent in 2023 and 2024, respectively. The company owns a 70-acre parcel of agricultural land with a 22-acre greenhouse structure. It has options on two additional 300-acre properties on which it plans to construct two other 57-acre high-tech greenhouses.
The PIPE deal implies a market cap and enterprise value of $112.5M and $104.3M, respectively. This valuation is relatively high for a pre-revenue, light asset company exposed to significant funding, construction, marketing, and regulatory risks. Liberalizing regulations surrounding cannabis research strikes us as a particularly important risk factor that could significantly reduce the company’s competitive advantage. Bright Green’s stock has fallen 94.5%, from $25.25 on May 17, 2022, to $1.40 on September 20, 2022.
Public Company Raises:
Three of the companies that raised capital this week were public. Two trade in Canada (one on NEO and one on the CSE), and all three trade in the U.S. (one on Nasdaq and two on OTC.)
Equity vs. Debt Cap Raises:
Equity accounted for two of this week’s raises and 43.1% of the funds raised.
Debt accounted for 64% of trailing 4-week capital raises, slightly above its LTM average of 61%. With reasonable prospects for the passage of the SAFE Act, CFOs are avoiding issuing equity.
The Week’s Largest Debt Raise:
On September 16, 2022, Trees Corp (TREES: NEO)(CANN: OTCQB), an MSO with operations in Colorado and Oregon, closed a $13.5M Senior Secured Convertible Note offering with warrants.
The notes have a 12% interest rate and mature on 9/16/26.
50% of the notes are convertible at a conversion price of $1.00 (400% premium)
Investors also received warrants equal to 20% coverage at a strike price of $.7 (250% premium) with a five-year expiration.
The limit of 50% convertibility, along with the extremely high conversion premium, sharply limits the value of the conversion option. Similarly, the relatively low warrant coverage and 250% exercise premium reduce the value of the warrant package. Taken as a whole, these equity-linked features only increase the effective cost of the notes to 12.03%. Lots of complications but not much value unless you think TREES will quadruple in price.
The Viridian Capital Credit Tracker scoring model ranks Trees as the 5th best credit in the group of 13 U.S. Cultivation & Retail companies with market caps between $10M and $100M in the Viridian database. Although smaller than most of the group, Trees has the fourth lowest leverage score.
MERGERS & ACQUISITIONS
One M&A transaction closed this week with a total disclosed transaction value of $8.9M compared to twelve transactions for $558.4M in the prior year.
Total YTD M&A volume is down 80.3% from 2021, with $4.32B in consideration and 134 deals closed versus $21.91B in transaction value and 249 closings in 2021.
Last year’s total included two of the largest M&A transactions ever done in cannabis, the $4.5B Tilray acquisition of Aphria and the $7.2B Jazz Pharma acquisition of GW Pharma. Without the two megadeals mentioned above, the volume in 2022 would trail 2021 by 57.8% YTD.
U.S. volume is down 64.5% YTD, with 41.4% fewer transactions.
The average transaction size of $33.1M is down 39.5% from 2021. Still, it is expected to grow considerably as large public/public transactions like Cresco/Columbia Care and Verano/Goodness Growth close in the 4th quarter.
Major Pending Deals Risk Arb
The Cresco/Columbia deal spread widened by 190bp to 12.6% on 9/16/22. The deal still requires some state approvals and the completion of significant asset sales, which may be more difficult in the current financing environment. Management painted an optimistic picture on the recent earnings call, indicating that buyers have been identified. We continue to expect a late 2022 closing.
The Verano/ Goodness Growth spread narrowed by 220bp to 6.5% as of 9/16/22, the lowest since the end of June. Verano successfully refiled its last year’s financial statements with little impact, paving the way for the transaction closing.
The valuation gap narrowed to 3.37 on 9/16/22 compared to 3.97 last week and below its 3.77 YTD average. 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, which has averaged around 3.8 points in 2022, tends to increase in improving markets while declining in retreating markets.
An above four-point gap is conducive to accretive transactions between the largest MSOs and smaller competitors. At the same time, a tighter financing market makes it more challenging for small companies to finance the growth of their business.
The Largest M&A Deal of the Week:
On September 15, 2022, Glass House Brands (GLASF: OTCQX), an integrated California cannabis competitor best known for its mammoth greenhouse grow facility, announced the closing of the acquisition of the Natural Healing Center dispensaries located in Morrow Bay, California, for total consideration of $8.8M
Total consideration for the transaction was composed of $8.8M of stock.
Glass House is aggressively pursuing retail locations it can stock with its low-cost cultivation and processing and Plus Products edibles. Glass House’s strategy makes excellent sense as long as the company does not overextend itself in the current weak California environment. The plan is designed to maximize the company value in a post-legalization/ interstate commerce marketplace. Glass House expects to be free cash flow positive by the first quarter of 2023.
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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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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