Viridian Cannabis Deal Tracker - Week Ending October 8th, 2021
Transactional Activity: There were ten more transactions and a $447.0 million higher volume this week than in the prior week. Compared to last year's same week, ten more transactions closed with a $434.6 million higher volume. The average deal size was $33.5 million this week vs. $13.5 million in the same week last year.
$73.0 million equity raises closed this week, significantly below the YTD weekly average of $147M. Debt was again the star of the show, with a total of $428.9 of proceeds.
Cannabis stocks were down 3.1% for the week as measured by the AdvisorShares Pure U.S. Cannabis ETF, a disappointing performance given the small gain (.79%) on the S&P 500. Macro issues include stubbornly high inflation exacerbated by energy cost spikes, supply line tangles, and, of course, Delta.
Big gainers and losers for the week included:
Total capital raised YTD in 2021 of $10.0B is now approximately $.80B 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 382 (10%), and U.S. debt raises are up by $1,252M (124%) compared to 2019. Canadian raises are off sharply, with equity raises down 48% and debt down 18%.
The Viridian Capital Graph of the Week shown below demonstrated the strong inverse relationship between equity prices and the percentage of debt In capital raises.
Largest Equity Raise: On October 4, 2021, SH Parent, Inc., the holding company of Parallel inc., raised $43.3M in a Reg D issue of convertible securities. No details were disclosed; however, the timing is interesting coming so soon after the cancelation of the company's SPAC deal. Parallel is one of the largest remaining private MSOs. Still, its markets, including Florida and Massachusetts, have become more competitive over the last six months as other large, well-funded MSOs have entered.
Public Company Listings: Nine of the thirteen companies that raised capital this week were public. Seven trade in Canada (five on the CSE, and two on the TSX), and six trade in the U.S. (five on the OTC, and one on Nasdaq).
Equity vs. Debt Cap Raises: Equity accounted for four of the five raises and 14.9% of capital raised.
Largest Debt Raise: On October 6, 2021, Trulieve Cannabis (CSE: TRUL)(OTCQX; TCNNF) closed the largest debt transaction in U.S. cannabis history. We covered this transaction in great detail in last week's tracker. We have updated our numbers for this week, and the Viridian Credit Tracker continues to rank Trulieve as the second-best U.S. MSO in terms of credit quality after GTI.
Most Interesting Debt Deal:On October 5, 2021, Akerna Corp. (Nasdaq: KERN), a leading enterprise software company, entered into a $20 convertible debt financing agreement.
The Senior Secured Convertible Notes mature on October 5, 2024.
The notes are issued at a 10% discount and do not bear interest.
The conversion price of the notes is $4.05 per share (a 46% premium to the $2.77 stock price at the transaction date).
The notes have monthly amortization payments of $1.1M beginning in January 2022, which increases to $1.2 million per month in April 2022. The company has the option to make installment payments either in cash or stock at the lower of the conversion price ($4.05) or 90% of VWAP for the trading day preceding the payment.
Change of control provisions provide for payment of the greater of 115% of outstanding principal or 115% of the conversion value of outstanding notes.
The company can prepay the notes at the greater of 121% of the principal or 115% of the conversion price applicable to installment payments.
The proceeds will fund the $4.5M cash payment for the company's acquisition of 365 Cannabis and payoff approximately $3.3M of the prior convertible note. (Note: Viridian Capital Advisors was the sole M&A advisor to 365 Cannabis on this transaction).
Why is this transaction interesting?
Viridian analyzed the effective cost of this transaction at approximately 15.7%, which seems expensive for a Nasdaq traded non-plant-touching company. The effective cost is the IRR of the cash flows after subtracting the OID and the value of the embedded options from the proceeds. We calculated a total value of approximately $552,000 for a series of options corresponding to each amortization payment. The chart below shows our assumptions.
The IRR without the conversion option value would be approximately 12.15%, reflecting the OID and aggressive amortization schedule.
The conversion option was calculated using a 40% volatility. Increasing the volatility assumption to 50% would increase the IRR to 18.3%
The Deal is cleverly structured to give Akerna the right to prepay the notes at costs that essentially are the same as issuing equity at a 10% discount at each installment payment. The investor locks in an attractive IRR with substantial equity upside.
How does Akerna look as a credit?
The Viridian Credit Tracker model ranks Akerna as the seventh-best credit out of the 12 Software/Media companies we track with more than a $25M market cap.
The company's ranking is hurt by higher than median debt/Market cap and analyst estimates showing negative 2022 and 2023 EBITDA. The analyst estimates do not yet reflect any view on the impact of recent acquisitions.
One mitigant is Akerna's strong liquidity with proforma cash of approximately $20M.
We applaud the innovative structuring of this transaction which simultaneously serves both company and investor well.
Cap Raises by Sector: This week's fifteen capital raises come from a wide variety of sectors:
Mergers & Acquisitions
Transactional Activity: Four M&A transactions were completed this week, compared to two in the prior-year period. We have tracked 259 transactions YTD in 2021, compared to 65 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 181 US targeted M&A transactions YTD with a record $8.2 Billion in total consideration. Both transaction numbers and total consideration exceed the values recorded in each of the last two full years.
One of the key drivers of the M&A wave has been increased deal sizes, as shown below.
Largest M&A Deal of the week: On October 4, 2021, AYR Wellness Inc. (CSE: AYR.A)( OTCQX: AYRWF), the tenth-largest MSO by market cap, announced that it closed on the purchase of 100% of the membership interests of PA Natural Medicine, LLC, an operator of three retail dispensaries in Pennsylvania.
Stores are located in college towns of Bloomsburg and State College, as well as in Selinsgrove.
AYR will rebrand the stores AYR.
The total consideration of $80 million is composed of $20M stock, $25M seller notes, and $35M cash.
AYR is expected to receive approximately $50 million in additional cash from unrelated exercises of warrants ahead of their accelerated expiry.
Public vs. Private: All four of this week's acquisitions were made by public companies.
M&A by Sector: The buyers and sellers in this week's deals were from the following sectors: