Viridian Cannabis Deal Tracker - Week Ending March 26, 2021
Transactional Activity: There were fourteen fewer capital raises and $1,092.0 million lower volume this week than in the prior week. Compared to the same week last year, one more transaction closed with a $24.2 million higher volume. The average deal size was $6.8 million this week vs. $4.3 million in the same week last year.
Cannabis drifted lower this week, and the price of our basket of 25 cannabis stocks was down 9.9%.
One of the critical reasons for the weakening is that the yield curve has become steeper in the closely watched 2-10 year range than it has been for over five years, indicating the market's belief that medium-term rates will head higher. Higher rates translate into higher discount rates in DCF valuation and subsequently produce lower valuations. The market drift has little to do with earnings; six of the seven largest MSOs that had reported 4th quarter results as of the end of last week beat consensus analyst EBITDA expectations.
Largest Equity Raise: On March 26th, 2021, Sweet Water, a private Los Angeles-based cannabis retailer, closed on a $15 million Series A financing round led by AFI capital partners. The company currently has four locations in L.A. and a delivery service and has ambitious plans for the capital. It intends to expand manufacturing and distribution across California, build a production hub in downtown L.A. and roll out an in-house brand. Sweet Water even has its eyes on New York. The company's CEO wasn't shy about it: "Sweet Water is the future state of retail cannabis, and we are ideally positioned for the New York market." With every significant MSO eyeing the same opportunity, color us New York skeptical.
Public Company Listings: All six of the public companies that raised capital this week are listed in Canada on the CSE, and four of them also trade on the OTC.
Equity vs. Debt Cap Raises: Equity-based capital accounted for five of this week's eight capital raises but only accounted for 32.3% of the total capital raised, making this the second consecutive week that equity took a back seat to debt in capital raising.
Debt Raises: The structures and characteristics of this week's three debt issues tell a Dickensian tale about the past, present, and future of cannabis debt.
Leafwire's $1.07 million Seed Financing Note reminds us of the first debt (or pseudo debt) transactions we ever tracked in the space. Not that there is anything old-fashioned about Leafwire, mind you-quite the contrary. Leafwire is the LinkedIn of cannabis. The company states that "We built Leafwire to provide a safe place for the cannabis business community to connect, share news, promote events, find employees, and just simply network."
The Leafwire structure Is not particularly unusual. It is a pretty typical private convert: a 6% coupon and an exchange price pegged to the lower of current pre-money private market value or a 15% discount to the next round pricing. The 15% is a bit low for this sort of deal but still, pretty much straight down the fairway. Suffice it to say that no traditional debt buyer would consider buying this because it is not really a debt instrument. The 6% coupon is a minor part of the return that holders are expecting, which is the equity kick. As debt instruments go, this is the tail wagging the dog. We calculate a roughly 25% effective cost for this deal which is arguably pretty fair for the venture risk.
Lots of early cannabis "debt" looked like this. Frankly, we feel a bit nostalgic when we read risk factors like the following from the Leafwire disclosure document, " The Company's Board does not keep minutes from its board meetings" (really?).
The industry leaped forward with the RTO wave in 2018, allowing companies to issue convertible debt against public stocks. Companies started pricing these converts at a premium rather than a discount. Many of these early converts also had exceptionally high warrant coverage, and we have tracked issues with total coverage of over 200%!
As the U.S. industry matured, the stronger companies started to look numerically more like high yield credits. The Debt/ EBITDA, EBITDA/ Interest expense, and other credit stats of the top-tier MSOs now compare favorably to many high yield credits. The debt structures began to migrate accordingly. Companies like GTI and Cresco were able to issue debt with slim warrant coverage. The very strongest have recently been able to issue debt with no equity kickers at all.
The Vireo Health $23.5 million, three-year senior secured term loan priced on March 23rd represents the modern structural flavor du jour.
The Senior Secured Term Loan has a coupon that is 13 5/8% in cash plus 2.75% PIK.
The deal includes 30% coverage in warrants that are struck based on the stock's ten-day weighted average trading price. (0% premium)
The high coupon and low exercise premium make this a rather expensive deal for the company, with an effective cost of approximately 18.7%
We are a bit surprised that the company had to pay this steep of a price. We view Vireo as a better credit than that and rank it as #4 out of the 24 U.S. Cultivation & Retail credits with market caps under $500 million that we track in the Viridian Capital Credit Tracker. It has reasonable liquidity and leverage and solid business positions in several markets with good adult legalization potential, including New York.
All of which leads us to the future of cannabis debt: The Bank Revolver!! Wow! we weren't sure when we would put those words together in the context of a U.S. cannabis company that touches the plant.
A federally insured bank made the loan, and the proceeds will be used to purchase a 47-acre production campus which includes 200,000 square feet of cultivation space.
We have seen commercial bank mortgage loans in cannabis companies before (See MariMed), but generally, they date to a period before the company was a plant-touching cannabis operator. We have yet to see a new loan issued to a company that is not only a plant-touching company but whose use of proceeds is clearly to provide cultivation capacity.
Priced at prime plus a premium with a floor of 5.75%, the loan is secured by substantially all of the company's assets. The deal includes a thin 10% warrant coverage, with the warrants struck at a premium of approximately 50% for an effective all-in cost of 5.9%.
Cap Raises by Sector: Of the eight companies which raised capital this week, five came from the Cultivation & Retail sector; and one each came from Infused Products & Extracts, Real Estate, and Software/Media.
Mergers & Acquisitions
Transactional Activity: Six M&A transactions were completed this week, up from one in the prior-year period. We have tracked 62 transactions in the first 12 weeks of 2021, which ranks higher than the comparable period in any year except 2019.
Largest M&A Transaction: On March 23rd, Ayr Wellness Inc. (CSE: AUR/A)(OTCQX: AYRWF), the sixth-largest U.S. MSO by market cap, announced the closing of its purchase of the membership interests of Blu Camo LLC, a vertically integrated Arizona company that operates three dispensaries and two cultivation operations.
The total consideration of $152.9 was composed of upfront payments of $9.5 million in cash and $66.5 million in stock, seller notes of $28.5 million, and potential earnouts of $53.2 paid in stock.
Public vs. Private: Five of this week's six acquisitions were made by public companies. With the recent surge in cannabis stock prices, we expect public companies to make add-on purchases of private companies using primarily stock as currency.
M&A by Sector: Four of this week's six buyers came from the cultivation & retail sector, with the other two from Hemp and Agriculture Technology. Three of the targets were cultivation & retail companies, one was from consumption devices, and the other was a Software/Media company.