Viridian Cannabis Deal Tracker - Week Ending September 3rd, 2021
Transactional Activity: There were equal numbers of transactions but a $326.6 million higher volume this week than in the prior week. Compared to last year's same week, four more transactions closed with a $560.2 million higher volume. The average deal size was $70.4 million this week vs. $14.7 million in the same week last year.
Debt deals took center stage. The $261M of closed US transactions was the 4th largest weekly total since the beginning of 2017. The $210M Ascend term loan discussed further below is an example of the trend towards a higher percentage of debt in the capital raise mix. The Viridian Capital Graph of the Week pictured below showed one apparent reason for this trend: debt costs are coming down.
Only $45.4M in equity raises closed this week, significantly below the YTD weekly average of $165M.
Cannabis stocks were essentially flat for the week, with the AdvisorShares Pure US Cannabis ETF down 0.56%. Hopes for a post-holiday pop have been rebuffed, with the index down a further 5% in week-to-date trading.
Big gainers and losers for the week included:
Total capital raised YTD in 2021 of $9.33B is now approximately $.83B lower than the same period in 2019 (the previous peak year); however, US capital raises are far more robust. US equity raises are up by $551M (15%), and US debt raises are up by $765M (80%) compared to 2019. Canadian raises are off sharply, with equity raises down 50% and debt down 4%.
Most Interesting Equity Raise: On August 31, 2021, Lowell Farms Inc. (CSE: LOWL)(OTCQX: LOWLF) announced the closing of a non-brokered private placement for gross proceeds of $18 million.
18 million units were sold at $1 per unit.
Each unit contains 1 subordinated voting share and ½ of a share in warrants.
The warrants have a three-year life and an exercise price of $1.40 per share ( a 40% premium).
We value the warrants at $.05 per unit producing a net price of $.95, 24.5% below the share price before the announcement.
The deal implies an EV/2021 consensus revenue of 4.4x a premium to the 3.0x median we calculate for US cultivation & retail sector companies with market caps between $100 and $750.
The transaction produces a meaningful gain in Lowell's liquidity and brings debt/Market Cap down to the .19x median for the group.
Proceeds will be used to expand the geographical coverage of the Lowell Smokes brand and to increase scale in California.
Public Company Listings: Seven of the nine companies that raised capital this week were public. Five trade in Canada (four on the CSE and one on the TSX) and seven in the US (four on the OTC and three on Nasdaq).
Equity vs. Debt Cap Raises: Equity accounted for four of the nine raises and 7.2% of capital raised.
Largest Debt Raise: On August 30, 2021, Ascend Wellness, Inc (CSE: AAWH.U)(OTCQX: AAWH), the sixth-largest MSO by market cap, closed a $210 million Senior Secured Term Loan loan with Pelorus Fund, a private real estate investment trust led managed by Seaport Global Securities LLC.
9.5% interest rate with no warrants or conversion.
Secured by a first lien on all company assets.
Under certain circumstances, the company can increase the facility by up to $65M.
Proceeds will finance the purchase of MedMen NY and support future growth initiatives and acquisitions.
The Viridian Credit Tracker system ranks AWH as the ninth-best US cultivation & retail credit. In that context, the 9.5% effective cost of this transaction represents a reduction in capital cost for the company while still amply rewarding investors.
Cap Raises by Sector: Four of this weeks capital raises came from Cultivation & Retail, two from Biotech/Pharma, and one each from Infused Products & Extracts, Software, and MIsc. Ancillary.
Mergers & Acquisitions
Transactional Activity: Ten M&A transactions were completed this week, compared to one in the prior-year period. We have tracked 227 transactions YTD in 2021, compared to 55 in the same period last year. Public companies were the buyers in 85% of 2021 deals YTD compared to 91% in 2020.
There have been 156 US targeted M&A transactions YTD with a record $5.8B in total consideration. Both transaction numbers and total consideration exceed the values recorded in each of the last two full years.
Most Interesting M&A Deal of the week: On September 1, 2021, TerrAscend Corp. (CSE: TER)(OTCQX: TRSSF) announced a definitive agreement to acquire Gage Growth Corp. (CSE: GAGE), a leading operator in Michigan operating three cultivation facilities, nine contract grow arrangements, and ten dispensaries. Gage has city and state approvals for 19 Class C cultivation licenses, three processing facilities, and 15 dispensaries.
Gage shareholders will receive .3001 TerrAscend common shares for each Gage share.
The exchange ratio implies a $2.11 share price for Gage, an 18% premium to the pre-announcement price.
Total consideration at the announcement date was approximately $545 million.
TerrAscend appears to be paying a reasonable price for Gage.
The total consideration represents a 1.8x multiple of consensus 2022 revenues and a 4.3x multiple of consensus 2022 EBITDA.
The Viridian Valuation Tracker data pictured below shows trading multiples of Cultivation & Retail companies with less than $1B market cap to be 1.35x 2022 consensus revenues and 6.46x consensus EBITDA
The Transaction value is understated because TerrAscend will also be purchasing licenses not held by Gage Growth Corp. The additional amount is unknown, but this will move the valuation multiples toward the market multiples.
TerrAscend trades at approximately 9.2x 2022 EBITDA, enabling Gage to purchase a significantly higher valued currency. We have noted this valuation arbitrage previously and believe it is key to understanding the continuing drive for consolidation.
The acquisition positions TerrAscend as the first mover among major MSOs in consolidating the Michigan market.
Michigan is the third-largest cannabis market in the US, with an annualized market size of over $2B.
Gage has exclusive licensing partnerships in Michigan with COOKIES, Slang, Kalifia Kush, and others.
Gage is a retail leader with average basket sizes of $152 in the 2nd quarter, nearly 80% higher than the state average.
Gage has an efficient "asset-light" operating model utilizing contract growers to supplement its company-operated cultivation facilities.
Public acquirer/public target deals are likely to become more common, although historically rare. YTD in 2021, we have tracked 156 closed US M&A transactions, and only 10 of them have been public companies buying public companies. Reasons for this trend to accelerate include:
Large MSOs continue to have significant cash positions, whereas smaller public companies have had more difficulty attracting growth capital and have much higher capital costs.
The gap between large public company and small public company valuations continues to support stock consideration.
Public companies tend to have better-established accounting, control, and operating systems making them easier to assimilate.
Viridian Equity Research had mentioned Gage as an attractive takeout candidate, and we believe several others fit this bill.
Public vs. Private: Nine of this week's ten acquisitions were made by public companies.
M&A by Sector: The buyers and sellers in this week's deals were from the following sectors: