Update On Cannabis M&A: Aurora, TerrAscend, SNDL, Curaleaf, And… A Costly Preferred Stock Raise?

On Thursday, analyst Pablo Zuanic from Cantor Fitzgerald offered an industry update on four recent M&A deals and Glasshouse Series B Preferred stock issuance.

Highlights

• Zuanic said the deal between Curaleaf Holdings Inc. CRBLF and Four20 Pharma stands out from the rest, because it could have the greatest long term strategic implications “especially if Curaleaf international goes for a NASDAQ listing (in the event US MSOs do not have a line of sight on listing themselves).”
• Regarding SNDL SNDL buying Valens VLNS, Zuanic said the deal helps the company develop its Canadian recreational moat, more than doubling recreational share and significantly growing its derivatives business. “The issue will be about making Valens profitable,” he clarified.
• Likewise, he commended Aurora Cannabis ACB buying 50.1% of Bevo Farms (a propagator) and qualified the operation as “the best way for the company to create value for the closure of the Sky facility.”
• Regarding TerrAscend TRSSF expanding its retail footprint in Michigan, Zuanic noted the move “goes against the grain for an MSO, (...) in what is a growing but challenging market.” Likewise, he noted the company’s Michigan retail network “outperforms in terms of revenue per store”.
• Beyond M&As, Zuanic reviewed the Glasshouse Series B Preferred stock issuance (dividends of 25% by year 4 plus warrants with strike prices 2x above the market price) vs. the Pharmacielo debentures (11% coupon; warrants with strike prices 3.4x the current market price).

SNDL Expands Its Footprint In The Rec Market

SNDL continues to expand its Canadian moat by buying Valens. On 8/22/22, Sundial Growers, also known as SNDL, announced it will acquire The Valens Company in an all-stock deal (0.3334 SDNL shares will be issued for every Valens share at closing), which at the time of the announcement was worth CA$138 million (SNDL already owned 6.2 million shares of VLNS for a 7.8% stake), for a 10% premium on the 30-day VWAP.

Closing is expected by Jan’23.

Aurora Sees Strategic Value In Propagation

Aurora enters the propagation segment and keeps half of Sky, for a different use now. Back in mid-May, Aurora said it would be closing its flagship Sky facility in Edmonton (one of the world’s largest cannabis greenhouse cultivation sites), as part of its cost-cutting efforts.

Although Sky assets would be divested (what could be recovered), ACB will retain 50.1% of Sky. “As the best value creation option for Sky, according to management, ACB will pay C$42Mn (after indemnities) in cash for a 50.1% stake in Bevo Farms (one of the largest suppliers of propagated vegetables and ornamental plants in North America), plus as much as $12Mn in earnouts over time,” Zuanic said.

Bevo will buy Sky from ACB for C$25Mn payable in the form of royalties once Sky becomes operational again.

As the cannabis industry evolves, ACB management sees attractive economics in propagation and horizontal integration, due to limited supply and strong demand from the overbuilt cultivation segment.

“Bevo operates 63 acres of greenhouses in BC, supplies greenhouses, nurseries, field farms, and wholesalers, and generated $9Mn in EBITDA over the last 12 months thru 6/30/22 ($39Mn in revenues); on the other hand, ACB generated -$49Mn in EBITDA in the March qtr,” Zuanic said.

TerrAscend Doubles Down On Michigan

On August 24, TerrAscend closed on the $28.5Mn acquisition of Kisa Enterprises, a retailer with six licenses in Michigan and five operational stores.

“With this deal, TerrAscend now has 17 stores in Michigan (3% of recreational store licenses), and 32 nationwide,” Zuanic said. “The Pinnacle stores will be rebranded to either the Gage or the Cookies banners.”

Curaleaf Waiting To See More Color On German Rec Market

“A NASDAQ listing of Curaleaf International could create significant value. In the early days, we thought that if Curaleaf International (68.5% owned by US multi-state operator Curaleaf) were listed on NASDAQ, the value creation could be significant. But we would assume the company would prefer to wait for investors to have better visibility on German rec[reational] legalization first. Given that Curaleaf International operates in markets where plant touching is legal (for medical purposes now), the company could be NASDAQ listed, unlike its MSO parent,” added Zuanic.

On Glasshouse’s Series B Preferred Stocks

Glasshouse GLASF, one of the biggest vertically integrated cannabis companies in the US, is issuing Series B Preferred Stocks with a face value of $50 million.

“Earlier this week it closed the first tranche for a combined $37.3 million, of which $22.6 million will go to pay holders of Series A Preferred Stock at face value (effectively, these will receive warrants with a strike price of $5 vs. $10 before under the A series),” Zuanic said. “The Series B Preferred stock will pay annual dividends of 20% (for years 1 and 2) rising to 25% by the 4th year and thereafter; the notes also carry warrants, with each $1,000 unit including 200 warrants with a $5 strike price.”

Meanwhile, Zuanic noted that Pharmacielo PCLOF raised $15 million in debentures this month at a coupon of "only" 11% and offering warrants at 3.4x the current price."

“Each $1,000 note carries an 11% coupon and 250 warrants with a strike price of CA$1.44 vs. a current share price of CA$0.42). So, the Glasshouse warrants strike price is 2x above the current share price and the preferred stock pays an average dividend in the mid-20s, while the Pharmacielo notes pay 11% and the strike price is 3.4x above,” Zuanic concluded.

Image By Ilona Szentivanyi.