Viridian Cannabis Deal Tracker - Week Ending November 12th, 2021
Transactional Activity: There were five fewer transactions but a $.4 million higher volume this week than the prior week. Compared to last year's same week, an equal number of transactions closed with a $164.2 million higher volume. The average deal size was $48.2 million this week vs. $7.2 million in the same week last year.
Three equity issues closed for total proceeds of 42.9 million, led by the $32.1 million Series C round by Fyllo.
Only one debt issue closed this week for a total proceed of $150 million. The issue by AYR was interesting because it is the first Yield to Call original issue we can remember in Cannabis.
We expect capital raises to continue to tilt towards debt issuance. We recommend that companies with positive cash flow take advantage of the solid liquidity and attractive terms offered in the debt market. We would urge companies to be willing to trade off a slightly higher coupon for better prepayment terms.
Total capital raised YTD in 2021 of $11.3B is now approximately $1.5B lower than the same period in 2018 (the previous peak year); however, U.S. capital raises are far more robust. US equity raises are up by $2,488M (109%), and US debt raises are up by $2,507M (7735%) compared to 2018. Canadian raises are off sharply, with equity raises down 75% and debt down 15%.
Cap Raises by Sector: Companies raising capital this week came from a diverse list of sectors.
Cannabis stocks were up 14.0% last week (as measured by the AdvisorShares Pure U.S. Cannabis ETF) but have retreated 5.6% this week as cash inflows slow. Year-to-date, cannabis stocks are down 12.0%, while the S&P 500 is up 24.7%.
Last week was a big week for 3rd quarter earnings releases which seem to have had little impact on stock prices.
The graph below shows the results for eight of the top MSOs. It is arranged with the most negative EBITDA surprises on the left and the most positive on the right. The dark green bars show the % surprise of EBITDA while the light show the % surprise of revenues. The yellow line show the stock price percentage change from one day prior to the announcement to one day after the announcement. The orange line adjusts the stock price change by subtracting out the percent change in the MSOS ETF, thus creating a market adjusted stock reaction.
Note that the market did not punish TerrAscend for significant negative surprises and did not reward Verano for significant positive surprises. Ascend actually had positive revenue and earnings surprises but had a market adjusted stock decline. GTI and Curaleaf are the two companies that reacted in the direction we would have expected. The market appeared to have been too busy speculating on the impacts of the Republican led legalization bill to react to earnings releases in a consistent manner.
Big gainers and losers for the week included:
Largest Equity Raise: On November 8, 2021, Fyllo, a private cannabis compliance platform, announced closing a $32.1 million Series C financing round.
Proceeds will build the companies talent base and make accretive acquisitions.
Eminence Capital led the round with Longview Capital, ArrowMark Partners, Arcadian Capital, Phyto Partners, and Salveo Capital.
Software/Media sector capital raises of $1.1 billion YTD are more than four times the previous full-year totals, and the sector is the target of a rapidly increasing number of M&A transactions.
Public Company Listings: Six of the nine companies that raised capital this week were public. Five trade in Canada (four on the CSE and one on TSX) and six trade in the U.S. (four on OTC and two on Nasdaq)
Equity vs. Debt Cap Raises: Equity accounted for five of the nine raises and 29.2% of capital raised.
Only one debt transaction closed this week but, at $150 million, the AYR debt issue was by far the most significant raise of the week. We believe the newfound optimism regarding federal legalization could have a perverse chilling effect on cannabis equity issuance. After all, no CFO wants to leave money on the table. Why raise equity today if you think there is a chance for legalization (up-listing) in the not-too-distant future. We believe two major roadblocks are still in place: interstate commerce, a consequence of legalization that will be immensely disruptive to the profitable limited license state model, and social equity, an area of widespread dispute between and within the political parties.
Meanwhile, we think debt issuance will continue to be strong:
The top U.S. MSOs are firmly EBITDA positive and continue to be under-levered.
Large, publicly-traded, well-funded debt investors are in a race to build high-coupon books before the radical tightening of spreads likely to follow legalization.
Largest and Most Interesting Debt Deal: On November 12, 2021, AYR Wellness (CSE: AYR.A)(OTCQX: AYRWF) announced the sale of an additional $150 million of its existing 12.5% Senior Secured Notes due 12/10/24.
The debt was sold as Additional Notes the existing Senior Secured Note indenture.
The notes were sold at 107% of par and a stated 9.8% yield to maturity.
Proceeds will fund capital spending, acquisitions, and other general corporate purposes.
The Yield to Maturity of 9.8% seems high relative to the company's credit quality as measured by the Viridian Credit Tracker scoring model in the graph below. The bars in the chart show the current Viridian Credit Score for each company. The line shows the effective cost of debt, taking into account any warrants or convertibility features and OID or premium at issuance.
According to our model, AYR ranks as the fourth-best credit, but its 9.8% yield to maturity is the highest of any company on the chart. In addition, the current yield (calculated by dividing the coupon by the price) of this issue is relatively high at 11.68%.
The graph shows that AYR should have achieved a rate below 9%, particularly given the consistently downward drift in debt costs previously discussed.
The table below shows the Viridian Credit tracker ranking of the Cultivation & Retail companies with over $1B market cap. We believe several companies, including Green Thumb and Curaleaf, could issue debt at rates closer to the 8-8.5% levels achieved by Trulieve and Verano.
Why did AYR open their existing indenture rather than selling a new lower coupon issue?
The 12.5% Senior Secured Notes of 12/10/24 is callable at 106.25% beginning 12/10/22 and par call beginning 12/10/23.
We calculate a yield to worst (par call in 2023) of only 8.9%, consistent with our expectations and making this the first new cannabis issue we have seen that should be valued on a yield-to-worst basis. AYR is doing what we have been advocating: they are paying a higher current yield in return for near-term callability at a low incremental cost in terms of YTW relative to a new issue.
AYR also avoids incremental debt issuance costs that would come from structuring and selling a new issue.
The company has room under its 4x Debt/ EBITDA debt incurrence test and 2x fixed charge coverage test. Interestingly, these covenant levels are not far off what one might see in the leveraged loan market.
Cannabis debt investors should become focused on YTW calculations, particularly given the likelihood of some form of legalization during the term of their debt investments.
Mergers & Acquisitions
Transactional Activity: We tracked five closed M&A transactions this week, compared to none in the prior-year period. We have chronicled 278 transactions YTD in 2021, compared to 74 in the same period last year. Public companies were the buyers in 85% of 2021 deals YTD compared to 89% in 2020.
There have been 191 US targeted M&A transactions YTD with a record $8.5 Billion in total consideration. Both transaction numbers and total consideration exceed the values recorded in each of the last two full years.
An important driver of the acceleration we are witnessing in U.S. M&A is the continuing valuation gap we have discussed between the most prominent companies and everyone else. Cultivation & Retail companies with over $1B market cap are now trading at a median of 8.24x 2022 consensus EBITDA. In contrast, companies with less than $1B market cap are trading at a median of 3.8x market cap. This near-arbitrage makes almost every acquisition by large MSOs accretive on an EBITDA per share basis. The stocks of the big MSOs are down YTD, but their targets are down even more, and the acquisition logic remains intact.
Most Interesting M&A Deal of the week: On November 11, 2021, Verano Holdings (CSE: VRNO)(OTCQX: VRNOF), the fourth-largest MSO by market cap, completed its acquisitions of Willow Brook Wellness, LLC, an owner of and active dispensary in Meriden, CT, Caring Nature, LLC an owner of a dispensary in Waterbury, CT, and Pharmaceutical Solutions, which holds a cultivation and production facility.
The $131.75M total consideration consists of $113.25M in stock, and $18.5M of additional shares payable upon the first adult-use sale of cannabis in C.T. Additional unstated amounts are payable upon meeting certain 2021 EBITDA milestones.
Operating measures for the targets were unavailable, but Verano expects the deals to be immediately accretive.
The acquisitions jump-start Verano's vertical integration in C.T. and complement its existing operations in P.A., NJ, MD, and M.A.
Other major MSOs with a Connecticut presence include Curaleaf, GTI, and Trulieve.
Public vs. Private: Four of this week's five acquisitions were made by public companies.
M&A by Sector: The buyers and sellers in this week's deals were from the following sectors:
Cultivation & Retail sector companies were the targets of approximately 60% of all cannabis M&A transactions in the second half of 2021, representing a historical high.