March 30, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Transactional Activity: There were three fewer transactions and a $57.5 million lower volume than the prior week. Compared to last year’s same week, six fewer transactions closed with a $3.2 million higher volume. The average deal size was $28.3 million this week vs. $6.7 million in the same week last year.
The ongoing tumultuous news cycle of war, inflation, new covid strains, etc. was overlayed with a week of relatively disappointing earnings, a delay in the New Jersey rollout, the reintroduction of the MORE Act back to the House, and perhaps most importantly, the announcement of another blockbuster M&A deal, Cresco/Columbia. Amazingly, the cannabis equity market shrugged all of this off to finish the week nearly flat, up 0.43%.
Total capital raises for the first twelve weeks of 2022 total $1.20B, down 74% from $4.56B last year. Reduced equity issuance (down 86% y/o/y in the U.S. and 97% in Canada) was partially compensated for in the U.S. by solid debt issuance (up 401% y/o/y, however, Canada’s debt decline of 93% brought total debt issuance down as well. As the graph below shows, capital raises for the first twelve weeks of 2022 were dominated by U.S. activity. A higher percentage of capital raises came from international locations than we have seen in any recent year’s first quarter.
This week, there were only two closed capital raises a $56.5M Venture Funding Round by Good Day Farm Arkansas and a $0.15 Convertible debt by Neuropathix, Inc.
The graph above shows the dramatic change in the financing environment over the last year. The first 12 months of 2021 had seven weeks when more than $200M of capital was raised, and the dark bars in that period indicate that most of that capital was equity. The markets were bubbling with the hope that federal legalization was close at hand. But from the crack in prices in mid-February 2021, the bars became increasingly lighter in color, as debt became the majority financing source. There has been only one week with more than $200M in capital raised so far in 2022m, and most of it was debt.
The decline in capital raises has affected all subsectors of the market. Cultivation has always been the largest sector, and its percentage share of raises has remained stable at around 60% over the last year.
Equity prices were up 0.43% for the week, as measured by the MSOS ETF. The ETF is now down 18.8% for the year.
Most major MSOs have reported 4th qtr and 2021 full year results over the last two weeks. We have updated our Chart of the Week below with Planet 13’s results released today. Our conclusion remains: the market didn’t care whether a company beat or missed analyst estimates. The most significant 4th qtr EBITDA misses are on the left (as the green line portrays). The orange line depicts the return on the stock from the day before earnings release to the day after and then adjusts those amounts by subtracting the return on the MSOS ETF over the same period. Planet 13 had the second largest earnings miss but the best relative stock performance.
The biggest winners and losers: Interestingly, 3 Canadian companies were among the five biggest gainers last week: Sundial (Nasdaq: SNDL), Tilray (Nasdaq: TLRY), and Alcanna (TSX: CLIQ). A fourth, MedMen (CSE: MMEN), has a fate tied closely to Tilray. The Canadians appear to have rallied from the reintroduction of the MORE Act to the House. We think this legislative hail mary is likely to buoy prices a bit longer before what we believe will be almost certain disappointment sets back in. We are surprised at the magnitudes of some of these gains.
Largest Equity Raise: On March 22, 2022, Good Day Farm Arkansas, a health-focused hemp grower, raised $56.5M in a Venture Funding Round. The financing was a Rule 506(b) Reg D transaction, and no further details were disclosed.
Public Company Listings: One of the two companies that raised capital this week were public. The public company trades in the U.S. on the OTCQB.
Equity vs. Debt Cap Raises: Equity accounted for 99.7% of the week’s capital raises.
Debt accounted for 70% of trailing 4-week capital raises despite the low amount raised this week. We continue to foresee a strong debt issuance climate ahead. Capital providers have actively raised cash and are under pressure to deploy these funds while wide spreads are available. Although equity prices staged a bit of a comeback over the last two weeks, pricing levels and valuation multiples are still low. Additionally, the introduction of new partial legalization measures stalls equity capital raises. After all, if there is even a slight chance of one of these bills passing, wouldn’t you rather wait and see if you can raise at a much higher level?
The Largest Debt Deal: On March 21, 2022, Neuropathix Inc. (OTCQB: NPTX), an early-stage $3M market cap Pennsylvania biopharmaceutical company, raised $150,000 in a private placement of unsecured convertible notes:
The notes have a 3% coupon and a ten-year maturity.
The conversion price is the lower of $0.01 or 70% of the VWAP of the stock, a deep discount from its current trading price of $0.03.
The converts contain a provision that prevents conversion if the holder would thereby own more than 4.9% of the outstanding stock. On that basis, less than 1/2 of the issue is immediately convertible.
The effective cost of the issue is not simple to calculate. We assume immediate conversion of $47,800 worth of notes, the maximum allowed under the 4.9% restriction. In theory, the 4.78 million shares could be sold at the current market price of approximately $.03 per share, producing a gain of $143,500. We treat this gain as an OID and calculate the yield to the remaining maturity at the implied price of 4.33%. The resulting yield is approximately 72.6%. Pretty expensive financing!
At first blush, it appears the high yield may be appropriate. The company has a debt/ market cap of approximately .79x, which is not a disastrous level but relatively high for a pharma company. Similarly, the company’s current ratio of .02x and cash flow adjusted current ratio of -.14x indicate significant liquidity stress. Neuropathix is quite likely to require additional financing in the near term. One complicating factor is that the company’s September 2021 10Q notes that at least one of its outstanding debt tranches is in default. Some of the debt maturities can be taken care of with discount to market conversions, but the path is anything but smooth.
Approximately 22% of Neuropathix is owned by Medical Marijuana Inc.(OTC: MJNA), an OTCPINK company with ostensibly over $85M in market cap. The chairman of MJNA has also lent NPTX over $50k over the last year. All of which suggests that MJNA may be able to provide at least marginal credit support.
MERGERS & ACQUISITIONS
Transactional Activity: Only one M&A transaction closed this week with an undisclosed transaction amount vs. three transactions for $332.0M in the prior year. The buyer in this week’s transaction was public.
Total YTD M&A activity is up 1.7% from 2021, with $2.58BM in consideration and 55 deals closed. The top seven transactions greater than $100M account for 77.5% of YTD closed deals.
U.S. Transactions have been a bit weaker. YTD US targeted M&A consideration is down 7.4%, with 36% fewer transactions. The average transaction size of $55M is up nearly 45% and is expected to grow considerably as large public/public transactions such as Verano / Goodness Growth and Cresco/ Columbia Care close.
Despite the relative dip in U.S. targeted M&A transactions, the graph below shows that on a percentage basis, the U.S. still accounts for a close-to-peak 60% of total consideration, and we expect this percentage to increase through the rest of 2022 as further consolidation takes hold.
One driver of M&A activity remains muted. The valuation gap between the largest MSOs and the less than $300M market cap group, which are their primary targets, has been a significant driver of M&A activity since it creates the regular opportunity for accretive transactions. In the last several weeks, this gap has narrowed to record lows restraining these financially driven deals. Still, more strategic mergers like this week’s Cresco/ Columbia Care transaction are expected to make up the difference.
M&A Deal of the week: On March 22, 2022, MediPharm Labs (TSX: LABS)(OTCQX: MEDIF) announced the closing of an asset purchase of the intellectual property portfolio of Shelter Cannabis, including cannabis dried flower, pre-roll products, manufacturing know-how, trademarks, and provincial listings.
The transaction is structured as a royalty payment based solely on future Shelter Cannabis sales.
The acquisition fills a gap in MediPharm’s product portfolio. MediPhaarm has historically focused on extracted products and concentrates, and the addition of flower and pre-rolls through Shelter’s Wildlife and Craft branded product significantly widens MediPharm’s reach.
MediPharm will produce Shetler products at its existing Saskatchewan facility, requiring little additional capital spending. The increased utilization of this facility should be margin enhancing.
The Most Interesting Deal of the Week: On March 23, 2022, Cresco Labs (CSE: CL)(OTCQX: CRLBF) announced the acquisition of Columbia Care (CSE: CCHW)(OTCQX: CCHWF)
The deal calls for Columbia Care shareholders to receive .5579 shares of Cresco Labs for each share of Columbia Care held.
We estimate that CCHW has approximately 420 million outstanding shares producing a share value of roughly $1.40B at Cresco’s 3/29/22 closing price of $5.97. Adding in an estimated net debt of $243M, we arrive at an enterprise value of $1.64B, shy of the reported figure of $2B. We believe the reported figure may include leases and earnouts, but calls to Columbia Care for clarification were not returned before publication time. We will revise our figures upon filing the company’s 10K, which we presume will have more exact figures.
Cresco’s $5.97 closing share price implies a $3.33 price for Columbia, a 12.1% risk arb spread, which strikes us as a relatively low spread given the numerous complications of the required asset dispositions, likely long time before closing, and the possibility of an anti-trust review.
Based on our estimated E.V., we calculate an E.V./ 2022 revenue of 2.47x and E.V./2022 EBITDA of 11.0x. These figures compare to the 3,95x revenues and 9.7x EBITDA medians for the seven Cultivation & Retail companies in the Viridian Value Tracker with market caps over $1B.
The graphs below place the standalone Cresco and Columbia care and the combined company in the context of the other larger MSOs.
Cresco / Columbia will be the industry leader in the combined projected 2022 Revenues and EBITDA.
Based on the combined market cap, however, the combination will still trail Curaleaf (CSE: CURA), Green Thumb (CSE: GTII), and Trulieve (CSE: TRUL).
The combined company will have significant untapped debt capacity. Using a ballpark capacity limit of 3.0x, we estimate that the combined company could conservatively incur an additional $295M of debt. This calculation does not consider the integrated cash position or the further debt reduction, which is likely to be funded by required asset sales which may total well over $250M.
We believe the deal may be an important catalyst for the firming of prices, and we are looking for an acceleration of consolidation activity. Columbia’s management made what we think is a great point: the larger combined entity is better positioned to attract the institutional capital that is sure to flood into the industry post-legalization. This consolidation could take two different forms: an acquisition by one of the larger competitors like Trulieve, GTI, or Curaleaf, or a merger of relative equals that adds operating scale and allows the combined entity to trade at the higher multiples carried by the tier-one competitors. Potential combinations of Jushi (CSE: JUSH), Planet 13 (CSE: PLTH), AYR (CSE: AYR-A), and 4Front (CSE: FFNT) all fit this bill. We are confident that we haven’t seen the last of the big M&A deals of 2022.
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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