Transactional Activity: Week 31 ended July 24, 2020, saw an 86.5% lower dollar volume and 40% fewer transactions vs. the prior week of this year and a sharply lower dollar volume and number of transactions vs the prior-year period. We recorded 3 capital raise transactions totaling $34.8 million, vs 12 transactions totaling $142.9 million during the same week in 2019. The average tranche size was $11.6 million this week, vs. $11.9 million in the prior-year period. The capital raised this week was dominated by the $33.3 Jushi financing below.
Largest Cap Raise: On July 31, 2020, Jushi Holdings Inc., a multi-state operator focused on strategic expansion in limited license states, closed a $33.3 million 10%, 2.5-year senior secured notes with attached warrants transaction. Investor friendly terms allowed the deal to be upsized from its originally announced $15.25 million size. The effective cost of the notes/warrants package was an eye-popping 37%, driven by the 75% warrant coverage in 4.5-year warrants with an exercise price of $1.25, a 30% discount to the company’s closing price on July 31. This warrant package is worth around $14.3 million using the Black Scholes model with a conservative 30% volatility. The warrants include a cashless exercise provision, a feature we are surprised to have not seen more of. Cashless exercise allows the company to issue stock for only the “in-the-money” amount of the warrants, sharply limiting dilution. A standard 19.98 million warrant issue would represent approximately 20% dilution based on Jushi’s estimated fully diluted share count of 99.2 million. We estimate the total dilution with the cashless exercise warrants to be only 13.1% even if the stock doubles. This lower dilution partially makes up for the otherwise high cost of the deal. The use of proceeds is to fund the cash portion of the previously announced Pennsylvania grower-processor permit holder transaction. Pennsylvania, Virginia, Arizona, and Illinois are the 4 states that Jushi is most positive about according to a recent management presentation and the completion of this transaction will allow them a total of 15 retail stores in Pennsylvania, representing 10% of the allowed stores in the state.
Public vs. Private Cap Raises: 2 of the 3 capital raises, were closed by public companies. So far in 2020, public companies have accounted for 80% of all capital raises, vs. 68% for the same period in 2019. In 2020, public companies have accounted for 88% of total dollars raised, vs. 71% for the same period in 2019. Cannabis stock prices have increased by approximately 16% over the last four weeks and were up approximately 5% in the most recent week. Viridian Deal Tracker data shows a clear relationship between cannabis stock prices and both capital raise and M&A activity. The capital markets are gaining confidence in the cannabis industry based on its demonstrated resilience in the face of a weak economy and on renewed hopes for positive legislative developments following the upcoming national election.
Public Company Listings: Of the 2 public company capital raises, both are listed in Canada on the CSE and both also trade In the U.S. on the OTCQB.
Equity vs. Debt Cap Raises: Equity-based capital raises accounted for 2 of the 3 transactions but only 2.9% of the proceeds raised, the second consecutive week in which debt has dominated the financing.
Largest Equity Raise: The largest equity raise of the week was the July 30, 2020, US$1.04 million unit issues by The Yield Growth Corp, a phytoceutical and consumer packaged goods company. We estimate that the warrant attached to the unit is worth approximately C$0.01 giving a net share value of C$.09, slightly lower than the C$.095 closing price on the transaction date. Yield growths enterprise value of approximately US$11 million represents 6.4 times the company’s LTM sales.
Cap Raises by Sector: The 3 capital raises this week were spread across 3different industry sectors with one each in the Investments / M&A. Cultivation and Retail, and Software/Media sectors.
Mergers & Acquisitions
Transactional Activity: Week 31 saw 2 M&A transactions, vs 10 in the prior-year period. Though M&A activity is still far below the levels seen during the first half of 2019, we have begun to see a pickup in weekly activity. This is likely driven by the recently improved stock price performance of public cannabis companies, which have been the dominant acquirers.
Largest M&A Transaction: On July 27, Columbia Care Inc. closed a $14.0 million sale-leaseback transaction with Innovative Industrial properties. The transaction includes the Company’s dispensary, cultivation, and manufacturing facilities in Vineland, New Jersey, totaling approximately 54,000 square feet. Sales-leaseback transactions continue to offer the lowest financing cost available for borrowers with real estate assets.
Public vs. Private: Both of this week’s acquisitions were made by public companies as has been the case in 94% of M&A transactions announced in 2020. Public companies, particularly with the recovery in stock prices and fundraising ability, have been the dominant acquirers in the cannabis industry. Of the acquired companies, one was public. Private companies remain the dominant targets for acquirers, except for the growing number of sale-leaseback transactions, many of which have been done by large public MSOs.
M&A by Sector: Buyers came from 2 different sectors: Real Estate, and Infused Products & Extracts.