Viridian Cannabis Deal Tracker - Week Ending December 24th, 2021
Transactional Activity: There were two more transactions and a $556.9 million lower volume this week than the prior week. Compared to last year's same week, two more transactions closed with a $112.8 million lower volume. The average deal size was $13.9 million this week vs. $34.0 million in the same week last year.
Like last week, issuance was thin and focused on debt. Three issues dominated the week: Curaleaf's $50M add-on deal, a $45M Chicago Atlantic revolving credit, and a $20 million revolving credit/term loan by Power REIT.
We see capital raises continuing to tilt towards debt as stock prices hit new lows and companies are loathe to issue stock at the bottom while hope of banking reform is still in the air.
We continue to advise corporations to lean towards short-term or callable debt as a financing source. The spreads to treasuries look enormous, and capital providers will want to be paid a bit extra for doing the work on short maturity paper, but the optionality is well worth it.
Total capital raised YTD in 2021 of $12.7B is now approximately $1.4B lower than the same period in 2018 (the previous peak year). US equity raises are up by $1.9B (60%), and US debt raises are up by $3.4B (806%) compared to 2018. Meanwhile, Canadian equity raises are down $5.9B (76%), and debt raises are down $244M (12%.) Capital raises from the rest of the world are down sharply (80%).
Cap Raises by Sector:Companies raising capital this week came from a diverse list of sectors.
Cannabis stocks were up modestly in pre-holiday week trading as the last day surge brought the AdvisorShares Pure US Cannabis ETF up 5.2%. Year-to-date, cannabis stocks are down 30.5%, while the S&P 500 is up 25.8%
Total equity issuance was only $9.99 million split across six deals
Big gainers and losers for the week included:
Largest Equity Raise: On December 22, 2021, Vibe Growth Corp. (CSE: VIBE)(OTCPK: VBSCF), a vertically integrated California cannabis company, completed a non-brokered private placement with gross proceeds of $2.74M.
A single strategic investor purchased 8.8 million shares at $.31 per share.
Proceeds will help fund the phase 1 buildout of the company's 65,000 sq ft facility in Monterey County, which is scheduled to open in the 3rd quarter of 2022.
The private placement implies a market cap of $35M and an enterprise value of $30M. EV 2022 EBITDA of 4.2x is a slight premium to the 3.96x we calculate for the 11 US Cultivation & Retail companies with 2021 revenues of between $25M and $125m
Public Company Listings:Seven of the nine companies that raised capital this week are public. Four of them trade in Canada (3 on the CSE and one on TSX), and all seven trade in the US (4 on OTC, two on Nasdaq, and one on NYSE). Public companies accounted for 98.3% of capital raised this week
Equity vs. Debt Cap Raises:Equity accounted for six out of nine raises and 8.0% of capital raised.
Three debt transactions closed this week for total proceeds of $124.99M, including two transactions totaling $65M for companies that loan money to and conduct sales/leasebacks with cannabis companies. 2021 has been the hottest year ever for real estate sector debt issues, raising over $625M, which is more than 3x the debt raised by the sector in any previous year. Institutional money is being put to work indirectly in the cannabis debt market through these companies' debt and equity capital raises. There is a sense of urgency to get their funds deployed as potential banking reform may narrow available lending spreads.
Debt has accounted for 74% of capital raised in the trailing four-week period as companies pull back from painfully low stock prices and aggressive debt providers continue to build their books rapidly.
Two Interesting Debt Deals: Power REIT raised $20M from a federally-insured commercial bank in a relatively typical non-cannabis deal structure of a one-year revolver that fully amortizes over the five succeeding years. Pricing at 5.52% represents a spread of 441 basis points over the four-year treasury (the average life), almost 200 basis points higher than the BofA BB index. Even though Power Reit is a non-plant-touching business, there is still a premium attached to the risk of lending to the cannabis industry.
Similarly, on 12/21/21, Chicago Atlantic upsized its previously announced revolving credit by $45 million at a rate of 4.5%, a spread to treasuries of 421 bp. Investors appear to demand a higher spread for investing in a short maturity issue since they will have to redeploy the maturing capital.
We believe more large debt transactions will be hitting the market as astute financial officers keep their equity powder dry, awaiting a catalyst for better equity pricing. Institutional debt investors are indirectly lending to the cannabis industry by investing in listed US non-plant touching financial institutions like AFC Gamma, Power REIT, Chicago Atlantic, and NewLake Capital, and these companies are aggressively deploying this capital while lending spreads are still extremely attractive on a risk-adjusted basis.
Mergers & Acquisitions
Transactional Activity: Five M&A transactions closed this week, compared to one prior year. We have tracked 311 transactions YTD in 2021, compared to 87 in the same period last year. Public companies were the buyers in 86% of 2021 deals YTD compared to 90% in 2020.
There have been 211 US targeted M&A transactions YTD with a record $10.1 Billion in total consideration. 2021 Consideration is more than three times the amount of either 2019 or 2020.
M&A volume in the US has been heavily tilted towards the Cultivation & Retail sector. Cultivation accounted for a historically high 81% of all consideration in the 2nd half of 2021.
An essential driver of the acceleration we are witnessing in US M&A is the continuing valuation gap we have discussed between the most prominent companies and everyone else. Cultivation & Retail companies with over $750M in projected 2022 revenues are now trading at a median of 7.56x 2022 consensus EBITDA. In contrast, companies with less than $300M projected 2022 revenues are trading at a median of 3.96x 2022 EBITDA. This spread has narrowed by approximately .2 from last week but still represents an enormous funding advantage for large MSOs. Larger companies can also access the debt markets at much more attractive rates adding to their advantage as an acquirer.
Largest Closed M&A Deal of the week: On December 21, 2021, Organigram Holdings (TSX: OGI) completed a $27.75M acquisition of Quebec-based Laurentian Organics Inc.
The acquisition strengthens OGI's position in Quebec and adds craft grower Laurentian and hash brand Tremblant to OGIs portfolio.
Consideration includes upfront cash of $7.72M and OGI stock for $20M
The purchase price represents a 2.1x multiple of Laurentian's run-rate revenue of $13.1M and 6x its run-rate EBITDA of $4.6M. This strikes us as pretty fully priced
OGI plans to more than double Laurentian's cultivation capacity to gain market share utilizing OGI's national sales and distribution network.
The acquisition is relatively small considering OGI's $588M market cap
An announced deal which we find pretty interesting: On December 28, 2021, Curaleaf (CSE: CURA)(OTCQX: CURLF) announced the acquisition of Bloom Dispensaries, a private, integrated Arizona operator.
Bloom has four retail dispensaries in Phoenix, Tucson, Peoria, and Sedona and two adjacent cultivation and processing facilities totaling approximately 63,500 sq ft.
The total consideration of $211 million consists of $51M in cash and $160M in notes which are recourse only to the assets and equity of Bloom without any guarantee from Curaleaf.
The notes are structured in three series with $50M, $50M, and $60M, due on the transaction's first, second, and third anniversaries, respectively.
The purchase price represents 3.2x Bloom's estimated 2021 revenue and around 8.0x estimated EBITDA (based on 40%+ EBITDA margins). The valuation seems fair. Below is a summary table showing valuation metrics for the 15 US Cultivation & Retail companies with projected revenues between $25M and $200M in the Viridian Value Tracker database. Note the median EV/2021 EBITDA is 8.17x, slightly above the calculated value for Bloom. Bloom's revenue multiple is significantly higher than the median, reflecting Bloom's better profitability.
So what is so interesting about this deal? Leverage!
The $160M debt represents around 6x Bloom's EBITDA (depending on how much over 40% margins the company has), an almost unheard of amount of leverage on a cannabis company! Of the 15 companies represented in the table above, 10 have a positive estimated 2021 EBITDA. Their total aggregate debt of $742M is 3.3x their aggregate 2021 EBITDA est of $224M. Bloom will have 184% of the average leverage of the group. This is an LBO, one of the first in the cannabis world.
It is interesting to think about other ways Bloom's owners could have proceeded. For example, could they have just gone out and borrowed $160M (since they are lending it to Curaleaf anyway) and just paid themselves the cash? The $160M debt represents around 6x Bloom's EBITDA (depending on how much over 40% margins the company has), an almost unheard of amount of leverage on a cannabis company! Of the 15 companies represented in the table above, 10 have a positive estimated 2021 EBITDA. Their total aggregate debt of $742M is 3.3x their aggregate 2021 EBITDA est of $224M. Bloom will have 184% of the average leverage of the group. This transaction is an LBO, one of the first in the cannabis world.
It is interesting to think about other ways Bloom's owners could have proceeded. For example, could they have just gone out and borrowed $160M (since they are lending it to Curaleaf anyway) and just paid themselves the cash?
If it were possible, the resulting leveraged recap would have one exciting feature- Bloom's shareholders would still own 100% of the company (although, in theory, their equity would be worth $160M less). Below is an indicative sketch of what that might look like. Note: we have no special knowledge of Bloom, so this is just a sketch, not an actual projection.
Note that we have employed what we think are relatively aggressive assumptions:
Revenues growth at a 50% rate for the next three years
Margins remain at 40%+
Taxes are calculated as though all expenses are deductible (no 280e!)
No capital spending
The results show that the company would only repay about $100M in the first three years and would require another year or two to repay the debt, but at the end of the period, the shareholders would have pocketed the $160 and still own the company! It is unlikely that the company could do the transaction as outlined.
It is unlikely to have sufficient hard assets to collateralize a loan of that size, and the sketch above shows that the repayment period would have to be stretched. But certainly, there is a somewhat smaller recap that would be possible.
Curaleaf is likely to have to kick in more cash instead of just funding the note repayments from Bloom's cash flow.
We do, however, see in this scenario the confluence of several significant trends:
Valuations continue to drift downwards
Debt is getting cheaper and more readily available.
These factors will likely result in more leverage getting employed, and we think more companies will begin to consider leveraged recaps as an alternative to selling at low multiples. Banking reform, and 280e relief, in particular, would speed this movement. And as more major MSOs like Curaleaf can incur non-dilutive debt at sub 8% levels, look for more LBOs.
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 followingsectors: