December 7, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Five capital raise transactions totaling $27.6M closed this week. One less transaction closed than last week, but volume was up by $18.9M. Four fewer transactions closed than the previous year, and volume decreased by $373.9M. This week’s average deal size was $5.5M compared to $44.6M last year.
Cannabis capital raises are off 65.1% YTD.
Total Equity issuance is off 75.3%, and total debt issuance is down 49.2%.
U.S. debt is down only 38.7%, while Canadian debt is down a more significant 75.8%.
At 57.1% of total capital raised, debt remains the highest in history for comparable periods.
Public companies accounted for 74.5% of total financing YTD, down from 79.6% in 2021.
The graph below shows that U.S. activity dominated capital raises for the first forty-eight weeks of 2022, with 75.2% of all capital raised.
International capital raises of $318.7M represented 7.9% of total capital raises, exceeding the previous record of 6.3% in 2019.
The U.S. Cultivation & Retail sector has experienced a similar change in capital raise activity, although the components have changed significantly.
Total capital raised is down 62.7%, but equity capital raised is down approximately 96.3%.
Debt financing is down 28.1% YTD but accounts for about 95.0% of all capital raised; private companies raised 25.7% of it.
72.1% of total capital raises YTD were completed by public companies compared to 80.4% in 2021.
In 2022, there have been no equity deals above $25M.
Cannabis stock prices (measured by the MSOS ETF) were up 9.08% last week on the increased conviction about the passage of the SAFE+ act.
We thought SAFE would be inserted into the NDAA defense authorization bill; however, on Tuesday, Mitch McConnell, the Republican Senate leader, was critical of the attempt to “jam in unrelated items with no relationship whatsoever to defense.” Not sure if that was just political posturing, but the MSOS ETF was down sharply on the news. We still think there is a good chance for SAFE passage in the year-end Omnibus, but we have to admit we are a bit less confident than we were yesterday.
SAFE should produce a meaningful lift in cannabis equities, but we believe the more important impacts will be indirect. SAFE will likely encourage more financial institutions to provide custodial services for cannabis equities, increasing the liquidity of the stocks, promoting more trading volume, and enticing new investors. We believe this virtuous circle will eventually lead the exchanges to allow the uplisting of cannabis equities.
Last week’s gains propelled valuation multiples for the largest MSOs to levels last seen at the beginning of the year. Tier-two and Tier-three MSOs are not quite back to their beginning-of-the-year levels, but only because they tend to lag on the upside. Our valuation gap graph shows that approximately 50% gains could be achieved by returning multiples to their mid-2021 levels. We believe this is a conservative view of what can be expected within a couple of months of SAFE passage.
Multiple expansion is the primary route for stock appreciation because we expect EBITDAs to continue to be pressured by commoditization price declines and inflation-driven cost increases. Estimates for 2023 EBITDAs have continued to drift lower, with the latest downward revisions occurring as recently as last week.
Surprisingly, Canadian LPs, saw nearly as much price appreciation last week as the major MSOs. This doesn’t make much sense to us as we fail to see what benefits the Canadian LPs can garner from the passage of the SAFE act. Tier-one MSOs are currently priced at a 113% premium to large Canadian LPs in terms of enterprise value to next-twelve-month revenue, down from around 120% at the end of September.
YTD Returns by Public Company Category
Psychedelics recovered one ranking position in our listing of YTD performance by category.
Best and Worst Performers of the last week and YTD
Green Thumb (GTII: CSE), Cresco Labs (CL: CSE), Trulieve (TRUL: CSE), and TerrAscend (TER: CSE) were all on our top ten gainers list based entirely on the swirling SAFE rumors.
Nova Cannabis (NOVC: CSE) and Tilt Holding (TILT: NEO) were sharply lower after being on last week’s biggest gainer list. We saw no particular news to explain the swing.
The Week’s Largest Closed Equity Transaction:
On November 28, 2022, Blueberries Medical Corp. (BBM: CSE)(BBRRF: OTC), a Latin American licensed producer of medical cannabis, announced the completion of a non-brokered private placement of common shares for gross proceeds of approximately $1.1M.
The offering was led by Terraflos Inc, a cannabis producer with operations throughout Latin America founded by Facundo Garreton, a Blueberries director. Following the offering Mr. Garreton, directly and through Terraflos, owns approximately 44.7% of Blueberries on a fully diluted basis.
The issue values Blueberries at an enterprise value of approximately $4.0M, a multiple of 12.3x annualized revenues.
Proceeds will be used to add manufacturing capacities to extend the production of new cannabinoid isolates and high THC distillates, upgrade the extraction laboratory to comply with Q7A Good Manufacturing Practice Guidelines, and for general corporate purposes.
Public Company Raises:
All five companies that raised capital this week were public. All five trade in Canada (four on the CSE and one on the NEO), and four trade in the U.S. on OTC.
Equity vs. Debt Cap Raises:
Equity accounted for 4.5% of this week’s capital raises.
We saw two odd debt stories this week relating to debt retirement (but maybe we are just too cynical):
Aurora Cannabis (ACB: Nasdaq)(ACB: TSX) reported repurchasing $102.5M of convertible senior debt at 95.5% of par. Aurora’s stock reacted positively, gaining over 2% on the news. Don’t the stockholders realize what the source of this cash is? Aside from some minor asset sales, stock issuance is the only cash source the company has ever had. For a company that has been negative cash from operations for 15 consecutive quarters to repurchase bonds that are yielding 9.45% doesn’t seem like a reason to cheer! Granted, the bonds mature in Feb 2024 and need to be dealt with, but 95.5% doesn’t seem like enough of a discount.
In a similar vein, HEXO (HEXO: Nasdaq)(HEXO: TSX) announced that it had repaid the total $40M outstanding amount on its 8% unsecured convertible debentures that matured 12/5/22. “Repaying this debt marks a key milestone as we continue to build investor confidence,” said Charlie Bowman, CEO. Ok, so repaying maturing debt and thereby avoiding bankruptcy is rebuilding investor confidence? How about reversing a 15-quarter string of negative cash flow from operations? That would start to build some confidence.
Debt accounted for 69% of trailing 4-week capital raises. We expect this ratio to be volatile because of the limited capital raise activity but average above 50%. We are still awaiting the final closing of the Jushi (JUSHF: CSE) refinancing, and one critical missing detail is the pricing of the attached warrants. The company expects that the package will include 50% warrant coverage. The table below shows the effective cost of the deal based on a range of warrant exercise premiums.
On November 30, 2022, TerrAscend Corp. (TER: CSE)(TRSSF: OTCQX), the seventh largest U.S. MSO by market cap, announced a $25M borrowing under its amended credit facility with Chicago Atlantic as the agent.
The loan bears interest at the greater of Prime plus 6% or 13% and matures on November 1, 2024.
The loan is prepayable without penalty after 18 months.
The debentures have a 10% interest rate, mature on November 21, 2024, and are convertible at approximately US$0.037 per share (a 0.5% premium).
The loan proceeds, plus $30M of cash on hand, were used to repay the $55M outstanding balance on an existing senior secured term loan of $55M from November 2021.
Terrascend ranks 6th out of the 8 U.S. MSOs with market caps over $500M on the Viridian Credit Tracker model. TER has the weakest liquidity ranking of the group, with a cash flow adjusted current ratio of only .71x proforma for this issue. TerrAscend also ranks 6th on each of the four leverage variables in the Viridian Credit model. Based on this credit analysis, the 13% rate and 18 months of call protection strike us as attractive terms in today’s credit market.
MERGERS & ACQUISITIONS
Total YTD M&A volume is down 80.3% from 2021, with $4.87B in consideration and 166 deals closed versus $24.67B in transaction value and 302 closings in 2021.
Last year’s total included two of the largest M&A transactions ever done in cannabis, the $4.5B Tilray acquisition of Aphria and the $7.2B Jazz Pharma acquisition of GW Pharma. Without the two megadeals mentioned above, the volume in 2022 would trail 2021 by 62.4% YTD.
We believe the likelihood of relatively sizeable public/public M&A transactions has increased significantly based on the low trading multiples of tier 2 and 3 MSOs and SSOs, particularly those perceived to be cash flow pressured.
U.S. volume is down 68.3% YTD, with 34.8% fewer transactions.
The average transaction size of $30.8M is down 51.3% from 2021. Growth in transaction size will probably not be seen until early 2023 at the earliest as significant transactions have either been shelved (Verano/ Goodness Growth) or delayed into 2023 (Cresco/ Columbia).
Major Pending Deals Risk Arb
The Cresco/Columbia deal spread widened by 880 bp to 15.7% on 11/25/22. Management’s guidance of a late Q1 2023 closing seems credible, as several of the most significant obstacles have been cleared. We saw no news to account for the substantial widening in the arb spread. Perhaps panic short covering of Cresco?
The valuation gap narrowed to 4.53 on 12/2/22, 106 bps higher than its LTM average. The valuation gap is the difference between the EV/NTM EBITDA multiple for the largest MSOs and the multiple for the less than $300M market cap group, which are their primary targets.
This measure has been a significant driver of M&A activity since a larger gap creates an opportunity for more accretive transactions. The gap tends to increase in improving markets while declining in retreating markets.
A gap of over 4 points is conducive to accretive transactions between the largest MSOs and smaller competitors. At the same time, a tighter financing market makes it more challenging for small companies to finance the growth of their business.
We note that the gap is based on trading prices and not on values where a company could raise significant amounts of capital. The difference is crucial because one of the key drivers we see for accelerating M&A activity is the inability of smaller companies to finance themselves in the current cannabis capital markets.
The Most Interesting M&A Deal of the Week:
We tracked no closed M&A transactions this week or last, marking the first two-week period since Thanksgiving 2019 in which no M&A deals have closed.
VIEW DEAL TRACKERS
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.
Launched in January 2015, and having analyzed more than $60B in deals, the Viridian Cannabis Deal Tracker is a proprietary data service that monitors and analyzes capital raise and M&A activity in the legal cannabis and CBD industries. Each week the Deal Tracker provides proprietary data and market intelligence on transactions, including:
Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors – from Cultivation to Brands to Software)
Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A)
Principals to the Transaction (Issuer/Investor/Lender/Acquirer)
Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
Deals by Location of Issuer/Buyer/Seller ( To Track the Flow of Capital and M&A Deals by State and Country)
Credit Ratings (Leverage and Liquidity Ratios)
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