Viridian Cannabis Deal Tracker - Week Ending December 31st, 2021
Transactional Activity: There were six fewer transactions and a 94.4 million lower volume this week than the prior week. Compared to last year's same week, two fewer transactions closed with a $3.7 million lower volume. The average deal size was $10.2 million this week vs. $6.9 million in the same week last year.
Continuing the trend we have seen for the last several weeks, issuance was thin and focused on debt. Two debt issues dominated the week: a $15.6M upsized credit facility for Entourage Health and a $14.8M credit facility and extension of the existing credit facility. According to the Viridian Credit Tracker ranking model, these issues were completed for the two worst credits in the Canadian landscape, and both seem destined for future restructuring. Today, Aleafia announced skipping an interest payment to begin negotiations with its convertible debt holders. We would not be surprised to hear that similar discussions commence for Entourage.
We see capital raises continuing to tilt towards debt as stock prices languish and companies are loathe to issue stock at the bottom while hope of banking reform is still in the air. The Viridian Capital Chart of the Week, copied below, explored the potential for debt-fueled share repurchases in cannabis. We only know of one company AYR that has announced a buyback program but think the current environment is ripe for others to follow suit.
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 in 2021 of $12.8B was approximately $1.4B lower than the same period in 2018 (the previous peak year). U.S. equity raises are up by $1.9B (60%), and U.S. 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 slightly in pre-New-Years week trading, and the AdvisorShares Pure U.S. Cannabis ETF was up .9%. For the full year, cannabis stocks are down 29.9%, while the S&P 500 was up 26.9%.
There was only one equity deal for the week for $0.12M
Big gainers and losers for the week included:
Largest Equity Raise: On December 29, 2021, Nabis Holdings (CSE: NAB)(OTCQB: NABIF), a Canadian investment company with assets in multiple sectors, including real property and both U.S. and international cannabis markets, closed the second tranche of a non brokered private placement for gross proceeds of $0.12M.
Seven hundred seventy-five thousand shares were sold at approximately $.16 per share, a discount of roughly 28% from the pre-announcement price.
Along with last week's tranche 1, the transaction implies a market cap of approximately $1M and an enterprise value of $5.5M.
Public Company Listings: All three companies that raised capital this week are public. They all trade in Canada (one on the CSE and two on TSX) and in the U.S. on OTC.
Equity vs. Debt Cap Raises: Equity accounted for one out of three raises and 0.4% of capital raised.
Two companies raised debt this week, and interestingly they were both Canadian companies at the bottom of the Viridian Capital Credit tracker rankings. One of them, Aleafia, has already announced that it is in discussions to restructure its maturing convertible debt. We anticipate similar talks will begin soon concerning Entourage's maturing converts. The rates were not cheap, but the fact that debt capital is available for these companies is quite a change in the market. We doubt these deals could have been completed a year ago.
Debt has accounted for 88% 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.
This week's debt deals were both done at much higher effective costs than the weighted average for the sector.
An Interesting debt deal: On December 29, 2021, Aleafia Health (TSX: AH)(OTCQX: ALEAF) closed a credit facility for up to C$29M (US$14.8M).
The facility includes a C$7M revolving receivables facility and a C$12M term loan. The term loan was fully drawn at closing, and the revolver is expected to be drawn in January 2022.
The interest rate is "in-line" with the companies existing credit facility (12%) and payable monthly.
The maturity date is December 2023.
The facility is secured by 1st liens on the company's facilities in Paris, Ontario, and Grimsby, Ontario.
Proceeds will be used for working capital and to make a $5M principal payment on the existing "August Credit Facility."
The maturity of the August Facility was extended to December 2023, and a 1st lien mortgage was granted on the company's Port Perry, Ontario, outdoor grow facility.
Aleafia ranks #27 out of the 28 Canadian cultivation & retail companies with over $20M market cap in the Viridian Credit Tracker rankings.
We were surprised that the deal got done at only 12% with no equity kickers.
Today, the company announced that it skipped an interest payment on its convertible notes and entered restructuring discussions.
Another interesting deal, "Good Money after Bad."
On December 24, 2021, Entourage Health (TSX: ENTG)(OTCQX: ETRGF), formerly WeedMD, closed an upsized credit facility with an additional C$20M (US$15.6M) of funding.
15% interest rate with PIK ability. No warrants or equity kickers
Maturity: August 2022 (8 months)
Security: The 2nd priority debt has liens on substantially all corporate assets, junior to the company's senior secured debt, which matures in March 2022.
Lender: LiUna Penson Fund. LiUNA is the largest construction union in Canada. LPF owns over 20% of Entourage.
We are a bit dumbfounded that anyone would step up and loan C$20M to Entourage
Of the 28 Canadian cultivation & retail sector companies with market caps over $20M in our database, Entourage ranks dead last on the Viridian Capital Credit Tracker ranking model. (Aleafia ranks second to last). It is quite an accomplishment to be at the bottom of a class that includes Aurora and HEXO!
Entourage has had 12 consecutive quarters of negative Gross Profit and 13 out of the last 15 quarters of negative cash flow from operations. This illiquidity figures prominently in the company's auditor "going concern" footnote to its September quarter filing.
As of September 30, 2021, Entourage had negative working capital of C$41.6M (US$30M), primarily due to the upcoming March 2022 maturity of its senior credit facility. The short-term nature of the new facility does not boost this profile.
Entourage has a total of $C98.6M in debt maturing over the next 12 months:
C$39.4M in its senior 1st priority credit agreement due March 2022.
C$50M in its LiUNa 2nd priority secured credit agreement (including the new $20M advance) due August 2022.
C$10.8M Unsecured 8.5% Convertible Debentures (C$1.6 conversion price) due September 2022.
The debt structure is problematic: The big issue is the 1st priority maturity in March. Will the senior lender (BMO) agree to a longer-term credit agreement without a restructuring that keeps the junior debt from maturing before it? Or is the idea that the new C$20M advance from LiUNA pays out the maturity of the converts and keeps the ball rolling? At a minimum, we think the maturity of the LiUNA facility would have to be pushed out well beyond any new maturity of a 1st priority facility.
Our favorite credit ratio, Debt/ Market cap, does an excellent job of predicting distress across a wide range of industries. We have typically found that any value over 3x indicates distress. Entourage weighs in at 3.13x, the highest number in its peer group.
The stock market appears to agree with our assessment. Despite acquisitions and highly publicized relationships with Mary's Medicinals and Boston Beer, Entourage's stock has been down 60% since the end of the third quarter compared to a 21% decline in the MSOS ETF.
LiUNA is extending C$20M additional funds to protect its C$30M 2nd priority loan and its C$4.8M market equity value. Still, we don't think the 15% rate is nearly enough to take Entourage's risk. We understand the lack of warrants in the deal as we would consider them options on out-of-the-money options (the stock). The only thing we can think of is an M&A kick save – and it would be a beauty.
Mergers & Acquisitions
Transactional Activity: Three M&A transactions closed this week, compared to two in the prior year. We tracked 314 transactions in 2021, compared to 91 in the same period last year. Public companies were the buyers in 86% of 2021 deals compared to 91% in 2020.
There have been 214 US targeted M&A transactions YTD with a record $10.1 Billion in total consideration. 2021 Consideration is more than two times the amount of either 2019 or 2020.
M&A volume in the U.S. has been heavily tilted towards the Cultivation & Retail sector. Cultivation accounted for a historically high 82% 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 8.08x 2022 consensus EBITDA. In contrast, companies with less than $300M projected 2022 revenues are trading at a median of 5.22x 2022 EBITDA. Over the last three weeks, this spread has narrowed by approximately 70bp 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 30, 2021, Green Thumb Industries (CSE: GTII)(OTCQX: GTBIF) closed its acquisition of Minnesota operator LeafLine Industries for total consideration of $155M.
The acquisition gives GTI one of Minnesota's only two vertical licenses, including a cultivation facility and five dispensaries.
GTI also has an opportunity to open three additional retail locations in the state
Consideration includes upfront cash of $40M and GTI stock for $110M.
Minnesota currently has 29,000 registered patients and a limited product menu providing only vape, tinctures, and topicals. Flower and edibles will be added in late 2022.
Importantly, Minnesota's list of qualifying conditions includes chronic pain, which we consider a milestone on the way to adult-use legalization.
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: