November 24, 2021 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Transactional Activity: There were four more transactions but a $.156.1 million lower volume this week than the prior week. Compared to last year’s same week, four more transactions closed with a $45.3 million lower volume. The average deal size was $4.6 million this week vs. $20.5 million in the same week last year.
Six equity issues closed for total proceeds of 18.97 million, led by the $8.0 million private placement by Humble & Fume, Inc.
Only two debt issues closed this week for a total proceed of $17.58million. The SLANG Worlwide deal was interesting because of all the yield-enhancing features that Trulieve built into the structure.
We expect capital raises to continue to tilt towards debt issuance. The blip upward in equity prices from increased talk of federal legalization has now largely dissipated. Prices are retesting their end of October lows, and disappointing 3rd quarter earnings releases have not helped. 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. We caution, however, that only the large MSOs have enjoyed spectacular reductions in borrowing costs. Our evaluation of this week’s Slang deal shows that companies a bit further down the credit ladder are still paying relatively high rates. We expect these rates to come down as aggressive lenders in the space work to build pre-legalization portfolios.
Total capital raised YTD in 2021 of $11.3B is now approximately $2.1B lower than the same period in 2018 (the previous peak year). Results are sharply divided between the U.S. and Canada as increasingly, capital has flowed to the more profitable U.S. companies. U.S. equity raises are up by $1.9B (69%), and U.S. debt raises are up by $2,5B (667%) compared to 2018. Meanwhile, Canadian equity raises are down $5.7B (75%), and debt raises are down $284M (14%).
Cap Raises by Sector: Companies raising capital this week came from a diverse list of sectors.
Cannabis stocks were up 11.3% last week (as measured by the AdvisorShares Pure U.S. Cannabis ETF) and have retreated further in the first two trading days of the holiday-shortened week. Year-to-date, cannabis stocks are down 21.9%, while the S&P 500 is up 25.1%.
Five of the six equity issues closed during the week were from Canada, with one from the U.S. and one from India, where we have only tracked three issues since 2019.
Big gainers and losers for the week included:
Largest Equity Raise: On November 15, 2021, Humble & Fume (CSE: HMBL), Canada’s leading distributor of cannabis accessories to head shops, smoke shops, and dispensaries, announced the closing of an $8 million private placement to Green Acres Capital, which will own 15.2% of Humble after the transaction
Green Acre also entered into a definitive agreement to provide an additional $ million to create a joint venture and an LOI for an additional $10 million to bring its share of the J.V. up to 50%.
Green Acres received funding for the placement through an option agreement with Johnson Brothers, a leading wine, spirits, and beer distributor. The option agreement allows Johnson Brothers to purchase the Humble equity at a nominal amount once U.S. legalization has proceeded to the point that Johnson Brothers owning Humble equity would not jeopardize its alcohol licenses.
Funds will be used to accelerate Humble’s expansion into California.
The issue was sold at a steep discount of 24% to the price before the deal’s announcement. The transaction implies an enterprise value of approximately $30 million and an enterprise value to LTM revenues multiple of .5x, a steep discount to industry leader Greenlane at about 1.5x.
Public Company Listings: Five of the eight companies that raised capital this week were public. All five trade in Canada on the CSE, and three also in the U.S. on OTC.
Equity vs. Debt Cap Raises: Equity accounted for six of the eight raises and 29.2% of capital raised.
Only two debt transactions closed this week, but we believe 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.
This week’s most exciting deal shows that the large company/small company valuation gap we have discussed in the equity market is also a key feature of the debt market. Small companies, especially those with operational issues, are still subject to high effective debt costs.
Largest and Most Interesting Debt Deal: On November 16. 2021, Slang Worldwide (CSE: SNG)(OTCQB: SLGWF), a $52M market cap branded products company, announced a new $17.3 million Senior Secured Convertible Term-Loan
Investors include Trulieve Cannabis (CSE: TRUL)(OTCQX: TCNNF), which has an exclusive partnership with Slang in Florida, and two significant shareholders of Slang: Pura Vida Investments and Seventh Avenue investments.
The loan and an uncommitted accordion of $14.2 million will be used to develop Slang operations in Vermont.
The loan has several uncommon features that result in a high effective cost of approximately 23.8% when large MSOs have been incurring effective costs of 8-10%.
The coupon of 9.75% is Payable-in-Kind (PIK) quarterly.
The loan has an OID of 3%.
An additional $3.6M is payable at either maturity or any earlier redemption. This premium at maturity adds nearly 5% to the effective cost of the loan. Moreover, it functions together with the OID to provide the lenders with excellent call protection since the entire $3.6M is payable anytime the loan is retired.
The conversion price is $.1273 per share (approximately a 3% premium). This “at the money” convertibility is very expensive. Using Black Scholes valuation and low volatility of only 30%, we estimate, this feature adds approximately 8% to the effective cost.
Why is the cost so high? The Viridian Credit Tracker ranks Slang as the #8 of the 15 U.S. non-biotech or investment companies with market caps of between $20 and $100 million. This placement doesn’t seem to suggest as high a cost as we calculate for Slang. TransCanna, lower in our rankings, did a deal in September for an estimated 22.4% effective cost.
The high cost is consistent with our observation that the primary benefactors of the reducing credit spreads in cannabis have been the $750M plus market cap MSOs.
One factor that informs our numerical credit ranking is that Slang replaced its CEO and 4 of its Board Members a few days before its Q3 earnings release. The new Chairman and CEO Drew McManigle’s former posting was as founder and CEO of MACCO Restructuring Group. These optics suggest that the effective cost is not too high.
MERGERS & ACQUISITIONS
Transactional Activity: We tracked five closed M&A transactions this week, compared to three in the prior-year period. We have chronicled 288 transactions YTD in 2021, compared to 77 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 196 US targeted M&A transactions YTD with a record $9.4 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 9.13x 2022 consensus EBITDA. In contrast, companies with less than $1B market cap are trading at a median of 5.3x 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 16, 2021, Flora Growth (Nasdaq: FLGC), a $133 million market cap all-outdoor cultivator headquartered in Toronto, closed its acquisitions of Vessel Brand Inc., a branded supplier of vape pens and cartridges to leading MSOs.
The $31.5M total consideration consists of $23.5M in stock, and $8.0M in cash.
The transaction value represents approximately 4.77x Vessel’s LTM sales of $6.6M.
The transaction represents a continuation of the trend of Canadian companies investing in U.S operations.
Flora Growth subsequently closed a $30 million public offering of stock and warrants, which placed significant pressure on its stock price. Flora’s shares have traded down approximately 49% since November 17th.
Public vs. Private: All five of this week’s acquisitions were made by public companies.
M&A by Sector: The buyers and sellers in this week’s deals were from the following sectors:
The Viridian Cannabis Deal Tracker is a proprietary information service that monitors capital raise and M&Amp;Amp;A activity in the legal cannabis and hemp industry. Each week the Tracker aggregates and analyzed all closed deals and segments each according to key metrics:
Industry Sector (One of 12 sectors, from Cultivation to Brands)
Dollar value of the transaction
Region in which the deal occurred (Country or U.S. State)
Status of the company announcing the transaction (Public vs. Private)
Deal structure (Equity vs. Debt)
Key deal terms (Pricing and Valuation)
The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&Amp;Amp;Amp;A strategy.
Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&Amp;Amp;Amp;A transactions totaling over $45 billion in aggregate value.
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