Viridian Cannabis Deal Tracker - Week Ending May 28th, 2021
Transactional Activity: There were five fewer capital raises but a $264.1 million higher volume this week than in the prior week. Compared to the same week last year, two fewer transactions closed with a $307.1 million higher volume. The average deal size was $71.7 million this week vs. $7.3 million in the same week last year. This weeks' average deal size was skewed by the $327.6 million debt issue by HEXO.
The price of our basket of cannabis stocks was up 4.4% this week.
Total capital raised YTD in 2021 is approximately $410M lower than the same period in 2019, primarily because of lower debt issuance.
Largest Equity Raise: On May 26th, 2021, High Tides Inc.(TSXV: HITI)(OTCQB: HITID) closed a bought deal public offering at US$7.91 per unit for total proceeds of US$19.1 million.
Proceeds will be used to open new stores, complete acquisitions, repay debt, and general corporate purposes.
Each unit is composed of 1 common share and ½ warrant with a $10.1 exercise price (28% premium) and a three-year expiration.
The warrants are worth approximately $.48 per unit, giving a net share price of $7.44, a 14.3% discount to the trading price before the deal announcement.
The transaction implies a $375.5 million enterprise value and valuation metrics of 2.43x 2021 consensus revenues and 19.6x 2020 consensus EBITDA. These stats are slightly higher than the median revenue multiple of 2.7x and close to the 75 percentile level of EV/2021 EBITDA of 23.2x for the 63 Canadian cultivation & retail companies we track with market caps under $500 million.
High Tide's key credit stats pro-forma for this raise are in line with its peer group. As measured by debt/ market cap, Leverage is .2x and matches the median peer group number. Liquidity is buoyed by this raise, bringing the company's cash flow adjusted current ratio to 1.2x, significantly better than the peer group median of .64x.
2nd Largest Equity Raise On May 28th, BetterLife Pharma Inc. (CSE: BETR)(OTCQB: BETRF) closed a US$5.24 million sale of units at US$0.33 per unit. Each unit consists of one common share and one warrant exercisable at US$0.41 (a 24% premium) for three years.
Proceeds will fund the completion of preclinical studies on two of the company's programs.
The warrants are worth approximately $.04 per unit, giving a net share price of $.29, a 28.0% discount to the trading price before the deal announcement. The steep discount reflects the size of the issue, which increased the share count by 25.8%.
The transaction implies a $17.2 million enterprise value (net of the issue cash) and 8.7x EV/ Net Book Assets. This ratio is close to the median of 8.0x we measure for the 12 Canadian Biotech/Pharma companies we track with market caps under $100 million.
BetterLife's key credit stats proforma for this raise are generally worse than its peer group. As measured by debt/ market cap, Leverage is .14x vs. the median peer group number of .05x. Liquidity remains strained even after the equity raise. The company's cash flow adjusted current ratio is -.26x, compared to the peer group median of -.04x.
Public Company Listings: Three of the four public companies that raised capital this week are listed in Canada (one on CSE and two on TSX). In addition, three trade on OTC and one trades on the NYSE.
Equity vs. Debt Cap Raises: Equity-based capital accounted for nine of this week's ten capital raises nearly all of the funds raised.
Largest Debt Raise: Cannabis companies completed only one debt deal this week. HEXO Corp. (TSX: HEXO)(NYSE: HEXO) closed a public offering of $360 million principal amount of senior secured convertible notes maturing May 1, 2023.
Proceeds will fund the $331 million cash payment in HEXO's $766 million acquisition of Redecan in Ontario, the largest private Canadian LP.
The notes were issued at a 9% discount and bear no interest.
They are secured by substantially all of the assets of the company.
The conversion price of $6.80 is a 3.8% premium to the stock price before the issue.
The discount on the notes creates a yield to maturity of 5.0%, roughly in line with what one would expect for a large Canadian LP.
However, the low exercise price raises the effective cost of the issue to 14.4%, significantly higher than what similar-sized Canadian LPs or top-tier U.S. multistate operators pay on debt.
The high cost reflects market recognition of the significant execution risk that HEXO is taking on with three acquisitions announced in the last three months.
The integration of Redecan, 48North, and Zenabis will not be easy. The company needs to coordinate branding, distribution, and marketing and rationalize production across four different platforms. On the conference call, HEXO acknowledged the magnitude of the task and stated that they expect the process to take three to four quarters to complete. The issue is that every acquisition starts with optimistic plans to achieve significant synergies, yet most acquisitions fail. Why? It's just one of the most challenging things to get right in business.
The equity market generally seems to be willing to look ahead to the consolidated market position that HEXO can achieve; HEXO's stock price was up 9.5% on the Redecan announcement. The debt market is more cautious and is extracting lucrative terms to compensate for the perceived risks.
Cap Raises by Sector: The five companies which raised capital this week came from the following sectors:
Cultivation & Retail: 2
Infused Products & Extracts: 1
Biotech & Pharma: 1
Mergers & Acquisitions
Transactional Activity: Nine M&A transactions were completed this week, compared to two in the prior-year period. We have tracked 137 transactions YTD in 2021, compared to 32 in the same period last year. Public companies were the buyers in 84% of 2021 deals YTD compared to 91% in 2020. The number of deals with U.S. targets continues to run at record levels, and more international transactions are beginning to reemerge.
Largest M&A Transaction: On May 27th, Verano Holdings (CSE: VRNO), the third-largest MSO by market cap, closed three acquisitions in Pennsylvania that together will allow it to add nine dispensaries. The acquisitions and their transaction values are below:
The targets were all private companies, and detailed financial information is not available. Interestingly, 47% of total consideration was paid in cash, significantly higher than we have seen in most 2021 transactions.
We estimate that Verano could add $200 million of debt and still only be at the .06x median debt to market cap number of its peer group, the 10 MSOs with over $1 billion in market cap. We believe that level is quite conservative and belies a significantly higher debt capacity for Verano and other top-tier MSOs.
Public vs. Private: All nine of this week's acquisitions were made by companies.
M&A by Sector: The six buyers in this week's deals came from five different sectors: two from Cultivation & Retail and one each from Agriculture Technology, Biotech/Pharma, Hemp, and Real Estate.