Viridian Cannabis Deal Tracker - Week Ending February 5, 2021
Transactional Activity: There were two more capital raises but a $224.3 million lower volume this week than in the prior week. Compared to the same week last year, there were four more transactions and a $301.1 million lower volume. The average deal size of $14.3 million this week was significantly lower than the $59.0 million in the prior-year period because two large equity issues (IIPR $250M, Aphria $100M) skewed last year's totals.
Equity issuance through the first five weeks continues to be at historic levels. The $1.38 billion of closed deals in 2021's first five weeks was 26% higher than the previous high set in 2018 despite a small pullback this week. We don't believe the equity issuance spree is over. We note that Green Thumb updated their registration statement for potential issuance of up to 10 million subordinated shares (US$310 million at current prices) and has reportedly received an offer from a single institutional investor for nearly $100M. Similarly, Trulieve has filed a short form shelf prospectus for issuance of up to C$750 million (approx. US$584 million) of mixed equity and debt securities. With this week's Planet 13 deal, all of the top 10 market cap U.S. companies except Harvest Health and Rec have either issued equity of filed registration statements to do so. This week's issues were generally smaller than those of previous weeks, but except for the plus-sized GTI and Trulieve deals still on the docket, we expect this trend to continue. The graph below shows the average deal size for the first five weeks of each year, and despite the small pullback this week, the 2021 average deal size YTD exceeds all previous years. We expect to see equity issuance broaden to the second-tier companies; however, as we have noted here before, the impediment is the vast valuation gap between the biggest and the next level cannabis companies.
Largest Equity Raise: On February 4th, 2021, Sundial Growers Inc. (Nasdaq: SNDL)(FSE: 14K.F), the sixth-largest Canadian LP by market cap, announced the closing of a US$74.5 million best efforts underwritten offering of 74.5 million units at US$1.00 per unit. The transaction was done in two parts and had an unusual structure. The first part was a unit with one share and ½ share of warrants, while the second part was a unit composed of a penny warrant and a ½ share warrant on the same terms as the first part. This penny warrant is essentially just a share issuance, so we have collapsed the two elements in our analysis.
The shares were priced at a 27% discount to the pre-announcement price level, a somewhat more considerable haircut than we would have expected and indicative of market resistance. Additional proof of the transaction's difficulty is found in the warrant structure: 10% premiums and five-year duration are both off-market terms. The outsized warrant value (relative to most unit offerings) reduces the net price by 12% to $.88. In summary, a deal priced at a bit discount that needed an expensive warrant structure to complete.
The transaction values Sundial at 14.4x consensus 2021 revenue. Note the company's enterprise value is significantly lower than its market cap due to its $610M of stated proforma cash). The valuation compares to 13.5x for revenues for the 8 Canadian Cultivation & Retail companies with market caps of above $1 billion. A multiple of 14x sales seems relatively high for a company projected to have negative EBITDA through 2023.
The turnaround in Sundial's fortunes since September seems almost impossible to believe:
Its September quarterly report showed $72 million of debt classified as a current obligation. The company chronicled a series of 3 amendments and waivers to its secured debt facility and disclosed that its projections indicated that it would again breach its covenants by December 2020. That debt is now fully repaid.
The September statements show 505 million shares outstanding, which at $.24 per share gives a market cap of $121 million. The company currently has 1.56 billion shares out at a most recent price of $1.60 (up over 500% since Sept!), producing a market cap of nearly $2.5 billion!
The September statements show $22 million of unrestricted cash, whereas the company now has $610 million.
Sundial is possibly the finest example of a company that has converted its Reddit/Robinhood short squeeze based share price explosion into real liquid $ in the corporate coffers. Good for them! Forgive us for being a bit skeptical about any fundamental changes at the company justifying this Cinderella story.
Planet 13 closed the second-largest issue of the week with its C$69.0 (US$54.0) million bought deal public offering of 9.86 million units at US$5.47 per share.
The units were priced at a relatively steep discount of nearly 16% relative to the closing price pre-announcement, despite the issue only increasing share count by approximately 5%.
The transaction values Planet 13 at 7.0x consensus 2021 revenues and 23.2x 2021 EBITDA, slight premiums to the 6.8x revenues and 22.3x EBITDA multiples we show In the Viridian Value Tracker for U.S. Cultivation & Retail companies with more than $1 billion of market cap.
Proceeds will be used for acquisitions to expand outside of Nevada and for other general corporate purposes.
We believe Planet 13 could readily tap the debt markets if it chose to. The company is ranked #2 of the ten largest U.S. Cultivation & Retail companies in terms of credit quality in the Viridian Credit Tracker. Expansion outside of Nevada will mitigate the most serious credit risk we see: dependence on the Las Vegas market.
Public vs. Private Cap Raises: All twelve of this week's capital raises were closed by public companies. Public companies raised approximately 97% of the capital year to date in 2021, up from 94% last year. There has been a consistent trend towards public company capital raises, taking advantage of newly robust capital market conditions.
Public Company Listings: Eleven of the twelve public companies which raised capital are listed in Canada (9 on the CSE, one on the TSX, and one on the NEO). All twelve are also listed on other markets: (11 on the OTC and one on the Nasdaq).
Equity vs. Debt Cap Raises: Equity-based capital accounted for nine of this week's twelve closed deals and 90% of proceeds.
Largest Debt Raise: On February 2nd, iAnthus Capital Holdings (CSE:IAN)(OTCPK:ITHUF) announced the closing of a one-year US$11 million senior secured bridge loan, with an initial coupon of 14%, which will decline to 8% upon the completion of the company's previously announced recapitalization transaction.
The loan is secured by all of iAnthus New Jersey's assets, along with a corporate guarantee.
Interest is payable in kind quarterly.
Lenders in the transaction are the holders of the company's existing debt (the largest of which is Gotham Green).
The company's previously approved recapitalization plan will reduce its debt from $163.9M as of September 30th to approximately $130 million (including the $11M bridge loan) when completed.
Grown Rogue International (CSE: GRIN)(OTC: GRUSF) completed an interesting raise whereby one of its non-operating subsidiaries raised US$0.25 million in a 10% three-year unsecured promissory note with no warrants.
The unusual feature is the inclusion of the following phrase: "In addition, the subsidiary will make payments in months 39, 42, 45, and 48 that will double the principal investment (minus any interest paid)". Looking at the company's previous financings, we found one similar deal with a royalty that was capped at twice the principal amount.
If we assume that this is the case with this note and stretch the additional 100% of principal evenly over the months listed, we calculate an IRR of 28.7%.
The company's liquidity is improved by the combination of the debt and equity raises, increasing the proforma working capital to $928,000 from negative $322,000. However, the company's most recent quarter showed a negative 556,000 in free cash flow. Grown Rogue appears likely to require more funding before the end of the year.
Cap Raises by Sector: Six of the twelve companies that raised capital this week came from the Cultivation & Retail sector, three were from Biotech/Pharma, and one each came from Infused Products & Extracts, Software/Media, and Miscellaneous Ancillary.
Mergers & Acquisitions
Transactional Activity: Five M&A transactions were completed this week, up from 1 in the prior-year period. We continue to see signs of accelerating M&A activity, with over $1 billion of announced deals still to close.
Largest M&A Transaction: On February 4th, Schwazze (OTCQX: SHWZ), formerly operating as Medicine Man Technologies, announced the closing of its asset purchase of two additional Star Buds Colorado dispensaries in Denver Co. This transaction follows the acquisition and integration of six Star Buds locations in December 2020 and anticipates an additional five sites by the end of March.
Total consideration consisted of US$9.3 million consisted of $3.5 million in cash, $3.5 million in seller notes, and $2.3 million in Preferred Stock.
No financial information is available on the target assets.
In the week's second-largest deal, Power REIT (NYSE: PW) completed a $7.7 million purchase of a 37,000 square foot state-of-the-art greenhouse cultivation facility located in Riverside County, California.
The total consideration of $7.7 million consisted of $2.7 million in cash and 192,308 shares of Power REIT's preferred stock (NYSE: PRA) with a market value of $5 million as of 2/2/21
The property is leased to Canndescent, a seller of ultra-premium cannabis. Straight-line annual rent of $1 million provides a 14.0% current yield and an FFO yield of over 26%.
Public vs. Private: Four of this week's five acquisitions were made by public companies. With the recent surge in cannabis stock prices, we expect public companies to make add-on purchases of private companies using primarily stock as currency.
M&A by Sector: Two of the buyers in this week's transactions came from the Cultivation & Retail sector, with one from Real Estate, Software/Media, and Agriculture Technology. Two of the targets came from the Cultivation & Retail sector, with one from Biotech/Pharma, Software/Media, and Agriculture Technology.