Cannabis Deal Tracker - Week Ending December 25, 2020
Transactional Activity: Week 52 ended December 24th, 2020, saw a $104.0 million volume decrease with one less transaction vs. the prior week of this year and a $40.4 million decrease with two more transactions vs. the prior-year period. We tracked five capital raise transactions totaling $33.8 million, vs. three transactions totaling $74.2 million during the same week in 2019. The average tranche size was $6.8 million this week, vs. $24.7 million in the prior-year period. Last year's figures primarily reflected two debt financings: $42.7 million from Green Organic Duchman and $24.5 million from Jushi Holdings.
Largest Cap Raise: On December 21st, 2020, Indus Holdings (CSE: INDS)(OTCQX: INDXF), a vertically integrated cannabis company that manufactures both in-house brands and agency brands for third parties, announced the closing of a C$34.5 million (US$26.8M) underwritten public offering of 23 million units at C$1.50 per unit (US$1.17). Proceeds will be used to develop an additional cultivation and production facility, working capital, and other corporate purposes. Each unit was composed of one common share and one-half of one common share purchase warrant with a strike price of C$2.20 per share (US$1.71)(a premium of 71% to the closing price on the transaction date and 47% to the unit price) and a three-year maturity. We value the warrants at approximately US$0.05 per unit, giving a net share price of US$1.17 per share, a 17% premium to the actual closing price on the transaction date. The transaction was priced at a modest 7.67% discount to the company's share price at the announcement date despite the significant increase of 68.6% in total outstanding shares. The deal implies a US$77.4 million enterprise value, approximately .94X consensus 2021 revenues and 3.9X consensus 2021 EBITDA, significant discounts to the 3.3X 2021 revenues and 14.4X 2021 EBITDA we observe for the 17 U.S. Cultivation & Retail sector companies we track. Possible explanations include higher than expected damage to the company's California cultivation from the effects of wildfires and the continuing high debt to market cap level of 69%, despite the benefits of this significant equity raise. The transaction also improves Indus's liquidity, which was already reasonably good.
Public vs. Private Cap Raises: All five of this week's capital raises were closed by public companies. So far in 2020, public companies have accounted for 81% of all capital raises, vs. 64% for the same period in 2019. In 2020, public companies have accounted for 81% of total dollars raised, vs. 69% for the same period in 2019.
Public Company Listings: Of the five public company capital raises, all are listed in Canada (4 on the CSE and 1 on the TSX), and all six also trade on the OTC.
Equity vs. Debt Cap Raises: Equity-based capital accounted for four of this week's six closed raises and 95% of raised proceeds.
Largest Debt Raise: On December 23rd, Luff Enterprises Ltd (CSE: LUFF)(OTC: PGTMF), a CBD lifestyle company, announced the closing of a C$2.0 million (US$1.56 million), Secured Loan with a July 30th, 2021 maturity (extendible for an additional six months at the company's option) and a 12% rate. The loan is secured by the company's Nevada assets, which the company has for sale for $5.5 million, according to its September 2020 financial report. Proceeds will be used to support the expansion of sales and marketing efforts for the company's new CBD wellness products. The private investor group was given 12 million two-year warrants at a premium of approximately 66.7% to the closing price on the transaction date. The warrants add only about two bp to the transaction's effective cost due to the high premium and low warrant coverage (15%). More significant impacts come from the initial 3% fee and the subsequent 2% fee for the six-month extension, which we assume the company will take. The combination of fees and interest rate produces an effective cost of 16.89%, but the deal terms are advantageous. It provides a liquidity cushion for the working capital buildup for the company's new product launches with very low dilution, despite high market leverage (.68 debt to market cap proforma for the deal) and the fact that the company only recently exited from Canadian Bankruptcy (CCAA).
Cap Raises by Sector: The five capital raises this week were spread across three different industry sectors: two in Cultivation & Retail, one in Infused Products & Extracts, and one in Biotech/Pharma.
Mergers & Acquisitions
Transactional Activity: Week 52 saw two completed M&A transactions, up from one in the prior-year period. The number of completed M&A transactions year-to-date is down 71% vs. the comparable period of 2019 but, as we pointed out in this week's Viridian Graph of the Week, the dollar volume of M&A is down only about 47% with large deals of over $250 million being the driver. We are now beginning to see the acceleration of deal activity that we have been forecasting.
Largest M&A Transaction: On December 23rd, 2020, AYR Strategies (CSE: AYRA)(OTCQX: AYRWF), the 7th largest U.S. Cannabis company by market cap, closed on the acquisition of 100% of the membership interests of CannTech PA. The total consideration of US$57.4 million for the deal included US$27.2 million of cash, US$15.0 million of shares exchangeable into AYR subordinated voting shares, and US$15.2 million of seller notes. The acquisition includes a 143,000 sq. ft. cultivation and production facility on 13 acres, the first phase of which is complete and approved for cultivation. The purchase includes one opened and five planned dispensaries clustered in the Pittsburgh and Philadelphia areas. All six dispensaries are expected to be opened by the end of 2021. AYR's second acquisition in the highly profitable Pennsylvania market solidifies its ability to become a leader in both the retail and wholesale segments of the market.
Public vs. Private: This week's sole acquisition was made by a public company. Year-to-date, 92% of M&A transactions closed in 2020 have been made by public companies (up from 71% in 2019). Particularly with the recovery in stock prices and fundraising ability, public companies have been the dominant acquirers in the cannabis industry. Private companies remain the principal targets for acquirers.
M&A by Sector: The two buyers in this week's transactions came from the Cultivation & Retail sector, as did both acquisition targets.