Cannabis Deal Tracker - Week Ending September 18, 2020
Transactional Activity: Week 38 ended September 18, 2020, saw a $25.6 million higher dollar volume with 4 more transactions vs. the prior week of this year and a sharply lower dollar volume and number of transactions vs the prior-year period. We tracked 9 capital raise transactions totaling $46.7 million, vs 14 transactions totaling $80.8 million during the same week in 2019. The average tranche size was $5.2 million this week, vs. $5.8 million in the prior-year period.
Largest Cap Raise: On September 16, Holistic Industries, one of the largest private MSOs with operations in California, Maryland, Massachusetts, Michigan, Pennsylvania, and Washington D.C., raised US$35.0 million in an oversubscribed financing round. Terms of the transaction were not disclosed, however, we can make a few observations and assumptions to explore the company’s likely credit quality. 1) The company has built its portfolio of assets largely by winning licenses based on merit rather than through acquisitions. The company’s chairman Josh Gunderson noted in a 2019 interview that his company has been in existence for 10 years and focuses on being an operator rather than an aggregator, thereby avoiding having to merge disparate cultures and business systems/practices. 2) Holistic raised $55 million of equity in October 2019, an extremely tumultuous period in the cannabis capital markets. It is reasonable to assume that the company sold 20% or less of itself in that round, giving a conservative market cap estimate of over $275 million. 3) We believe, based on the company’s operating philosophy and concentration of assets in attractive markets including Pennsylvania, that the company is likely to be solidly EBITDA positive. 4) the press release for the transaction says that this will be the company’s only debt obligation. Synthesizing these considerations, we believe Holistic would likely rank in the top third of our U.S. MSO list on a credit quality basis.
Public vs. Private Cap Raises: 8 of this week’s 9 capital raises were closed by public companies. So far in 2020, public companies have accounted for 81% of all capital raises, vs. 67% for the same period in 2019. In 2020, public companies have accounted for 84% of total dollars raised, vs. 69% for the same period in 2019.
Public Company Listings: Of the 8 public company capital raises, all are listed in Canada on (7 on the CSE and 1 on the TSX), and 5 also trade on other markets (3 on the OTC and 2 on the FSE).
Equity vs. Debt Cap Raises: Equity-based capital raises accounted for 8 of this week’s 9 capital raises and accounted for 25% of the funds raised.
Largest Equity Raise: On September 18, Flower One Holdings, the largest cannabis cultivator, producer, and full-service brand fulfillment partner in the state of Nevada, closed a public offering of 23 million Equity Units at C$0.25 (US$0.19) per share for gross proceeds of C$5.7 (US$4.36 million). Each unit included a common share and a 3-year warrant with a C$0.36 exercise price. We value this warrant, struck at a 44% premium to the unit price, at only C$.01 per share. The deal was first announced on September 10 and the closing price on that day of C$0.23 is consistent with our warrant valuation. This is the company’s fourth equity issuance in 2020 and the stock is down 83% YTD. COVID-19 had a larger impact on Flower One than on most other cannabis companies due to its Nevada focus, but revenues appear poised for a significant resurgence in Q3.
Cap Raises by Sector: The 9 capital raises this week were spread across 3 different industry sectors with seven in Cultivation & Retail, one in Infused Products & Extracts, and one in Biotech/Pharma.
Mergers & Acquisitions
Transactional Activity: Week 38 saw 2 M&A transactions, down from 4 in the prior-year period. Although the number of M&A transactions completed year-to-date is down 78% vs the comparable period of 2019, we continue to expect increased activity in the remainder of the year.
Largest M&A Transaction: On September 16th, Choom Holdings Inc. (CSE: CHOO,) (OTCQ: CHOOF), a fast-expanding retail cannabis company with one of the largest store networks in Canada, completed its acquisition of Phivida Holdings (CSE: VIDA), a company engaged in the sale and distribution of custom formulated hemp oil extracts and hemp oil-infused beverages and nutraceuticals. Consideration consisted of 64.6 million shares of Choom, valued at US$4.78 million, and represented approximately 28.6% of the outstanding shares on a proforma basis. The purchase price was 5.4 times Phivida’s LTM Revenues of US$0.88 million a significant discount to the 7.95 times median multiple we calculate for the 28 Canadian Infused Products sector companies we track with market caps of under $100 million.
Public vs. Private: Both of this week’s two acquisitions were made by public companies. Year-to-date, 92% of M&A transactions closed in 2020 have been made by public companies (up from 70% in 2019). Public companies, particularly with the recovery in stock prices and fundraising ability, have been the dominant acquirers in the cannabis industry. Private companies remain the dominant targets for acquirers.
M&A by Sector: Both of the buyers in this week’s two deals came from the Cultivation & Retail sector. One target was from the Cultivation & Retail sector and the other from the Infused Product & Extracts sector.