Viridian Cannabis Deal Tracker - Week Ending October 1st, 2021
Transactional Activity: There was one more transaction but a $29.1 million lower volume this week than in the prior week. Compared to last year's same week, two fewer transactions closed with a $76.7 million lower volume. The average deal size was $11.0 million this week vs. $18.8 million in the same week last year.
Only $12.6 I million equity raises closed this week, significantly below the YTD weekly average of $153M.
Cannabis stocks were down 3.3% for the week as measured by the AdvisorShares Pure U.S. Cannabis ETF, a reasonable performance given a 2.2% loss on the S&P 500. Macro issues include stubbornly high inflation exacerbated by energy cost spike, supply line tangles, and, of course, Delta.
Big gainers and losers for the week included:
Total capital raised YTD in 2021 of $9.50B is now approximately $1.2B lower than the same period in 2019 (the previous peak year); however, U.S. capital raises are far more robust. U.S. equity raises are up by $342M (9%), and U.S. debt raises are up by $841M (84%) compared to 2019. Canadian raises are off sharply, with equity raises down 49% and debt down 17%.
Largest Equity Raise: On September 29, 2021, Skye Bioscience, Inc (OTCQB: SKYE), a biopharmaceutical company developing proprietary synthetic cannabinoid molecules to treat glaucoma and other diseases, announced the closing of its $7 million registered direct offering of Units.
Each unit consisted of 1 common share and one warrant with a strike price of $0.09 (0% premium) and a five-year life.
The five-year at-the-money warrants reduce the net share price by $.02 (27%). Skye's shares drifted 42% downward from the July announcement of the transaction.
Based on the company's $5 million of cash balances at the end of the June quarter and its ongoing cash burn rate of approximately $1.7 million per quarter, we estimate that the proceeds of this issue should fund the company for 1-1.5 years.
Public Company Listings: All five of the companies that raised capital this week were public.
Equity vs. Debt Cap Raises: Equity accounted for four of the five raises and 14.9% of capital raised.
Largest Debt Raise: On September 29, 2021, Pelorus Equity Group, the leading provider of bridge commercial real estate loans to cannabis entrepreneurs, announced that its Pelorus Fund, a mortgage REIT, closed on $42.25 million Senior Secured Notes due September 2026.
The notes have a 7% coupon with no equity participation features.
The notes were rated BBB+ by the Egan-Jones rating company, making this the first rated debt we have tracked in the sector.
Although we do not expect Moodys or S&P to begin rating cannabis companies until after the SAFE Act or broader legalization, the achievement of a rating cannot be overestimated.
Many debt funds have limited baskets for unrated debt, further crimping the audience for cannabis debt. We believe major credit rating entities entering the game will be instrumental in producing the credit spread reduction of more than 200 basis points we believe is possible.
Cap Raises by Sector: Three of this week's four capital raises came from Cultivation & Retail, one came from Biotech/Pharma, and one was from Real Estate.
Mergers & Acquisitions
Transactional Activity: Six M&A transactions were completed this week, compared to none in the prior-year period. We have tracked 255 transactions YTD in 2021, compared to 63 in the same period last year. Public companies were the buyers in 72% of 2021 deals YTD compared to 90% in 2020.
There have been 177 US targeted M&A transactions YTD with a record $7.9 Billion in total consideration. Both transaction numbers and total consideration exceed the values recorded in each of the last two full years.
The Viridian Capital Graph of the week copied below shows that increased deals sizes are a primary driver of the record U.S. M&A year in progress. Two of the largest recorded U.S. deals occurred in the 2nd and 3rd quarters of 2021, and we chronicle one of them, the Trulieve/Harvest deal, below.
Most Interesting M&A Deal of the week: On October 1, 2021, Trulieve (CSE: TRUL)(OTCQX: TCNNF) announced that it had completed its acquisition of Harvest Health & Recreation (CSE: HARV)(OTCQX: HRVSF) to create the largest U.S. MSO ranked by 2nd quarter sales.
Total consideration was approximately $1.412 billion based on the 50.87 million Trulieve shares issued, valued at the $27.77 transaction date price.
The combined company has operations in 11 states with 149 retail locations and over 3.1 million sq ft of cultivation.
Trulieve will have three hubs: the Southwest (AZ, CA, CO, NV), the Northeast (CT, MA, MD, PA, WV), and the Southeast (FL, GA). The combined company is the market leader in Arizona, Florida, and Pennsylvania, and the hub structure is conducive to further expansion.
How does the combined company compare with the other major MSOs? The graphs below show the size of the major MSOs and also include Trulieve and Harvest as standalone for comparison.
The combined company is the third-largest MSO by market cap, the second-largest by 2022 estimated revenues, and the largest by 2022 estimated EBITDA.
Why is this transaction important?
Of the 99 M&A transactions we have tracked YTD targeting U.S. Cultivation & Retail sector companies, only 11 have had public companies as the targets. We believe this is likely to change for several reasons:
Viridian equity research has pointed out several small to mid-sized public companies positioned for solid growth and profitability but trading at significant discounts to the large MSO multiples.
Public companies are frequently easier to assimilate due to their generally better developed operating and control systems.
The Trulieve/Harvest deal shows that billion $ transactions are back on the table. We see several profitable large private companies that might find it attractive to go public via a merger with a large public company or a merger with a smaller public company (essentially an RTO).
Is the market valuing the combination appropriately? We created a proforma combined company by adding consensus estimates of the separate companies and estimating market caps and enterprise values for the combined company.
We calculate a combined company 2022 EV/ Revenues of 3.2x and 2022 EV/ EBITDA of 8.0x
The table below shows the other MSOs, including Trulieve and Harvest, as standalone as of 10/1/21. The combined entity is trading at a modest valuation discount relative to the other competitors. The lower valuation may be attributable to concerns regarding greater competition in Florida, Trulieve's largest market.
In conjunction with the acquisition, Trulieve announced that it is raising $350 million of new debt.
Senior Secured Notes maturing on 10/6/26.
8% coupon with no equity kickers and no OID.
Non-callable for two years and then callable at scheduled premiums.
Approximately $240 million of the proceeds will retire existing Harvest debt, with the rest available for CAPEX and general corporate purposes.
The note deal is impressive and a smart move:
The issue will be the largest debt issue we have tracked for a U.S. cultivation & retail company and the eighth largest overall. ( the top 7 have been Canadian). The closest deals have been the $300 raised by Cureleaf in January 2020 and the $217 million raised by GTI in April 2021.
We have been advocating for a higher amount of debt in the cap structures of large MSOs because of the much lower capital cost and the recent entry of well funded institutional debt investors.
The maturity level of 5 years with callability after two years is an ideal combination of locking in a low rate with preserving flexibility to react to lower borrowing costs post-legalization.
How does the combined company look from a credit perspective?
We ran the combined company through the Viridian Credit Tracker ranking model while including the two companies as standalone for comparison.
The model uses 11 financial and market variables to measure four factors of credit quality: Liquidity, Leverage, Profitability, and Size.
The chart below shows the results: the combined company ranks as the second-best credit, behind Green Thumb. The combined company ranks lower than Trulieve as a standalone entity because our model ranked Harvest quite low as an independent entity.
For further comparison purposes, we have included graphs of both the Viridian Capital Advisors credit score and two other widely followed credit metrics: Debt/ Market Cap and the Altman Z score. Lower scores on the Viridian credit model indicate better credit quality. Lower Debt/ Mkt Cap also indicates better credit quality, while higher Altman Z-scores shows better quality.
The pricing is aggressive despite Trulieve/Harvest's perceived excellent credit quality. Other large MSOs have had to offer effective rates over 100 basis points higher during the 2nd and 3rd quarters of 2021. The table below shows comparable debt financings in 2021.
Market acceptance of this issue at this pricing shows the continued decline in debt capital costs which we highlighted in a recent Viridian Capital Graphs of the Week.
We expect to see MSOs continue to utilize more debt in their capital structures. Debt is less costly, and it buys flexibility to wait for improved equity pricing, possibly from uplisting or legalization events.
Public vs. Private: Five of this week's six acquisitions were made by public companies.
M&A by Sector: The buyers and sellers in this week's deals were from the following sectors: