Investment And M&A Activity In The Cannabis Industry Heats Up Going Into February

The Viridian Cannabis Deal Tracker is an information service that monitors capital raise and M&A activity in the legal cannabis industry. Each week the Tracker analyzes/aggregates all closed deals and allocates each transaction to one of twelve key industry sectors in which the deal occurred (from Cultivation to Brands), the region in which the deal occurred (country or U.S. state), the status of the company announcing the transaction (public vs. private) and the type of deal structure (equity vs. debt).

The Viridian Cannabis Deal Tracker provides the deal data/terms/valuations/structures and market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital and M&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&A transactions totaling over $45 billion in aggregate value. Find it exclusively on Benzinga Cannabis every week!

INVESTMENT AND M&A ACTIVITY IN THE CANNABIS INDUSTRY

1/25/2021 - 1/29/2021

CAPITAL RAISES

Transactional Activity: There were four more capital raises and $115.2 million higher volume this week than in the prior week. Compared to the same week last year, there were three more transactions and $390.0 million higher volume. This week's average deal size was $39.6 million vs. $5.6 million in the prior-year period.

The equity market continued at a record pace despite this week's 11% retreat in stock price levels. The $1.3 billion of closed deals in 2021's first four weeks was 81% higher than the previous high set in 2018. This week's deals included an eclectic mix of MSOs, LPs, troubled companies, and a Reg A+ issue. The most notable feature of the transactions was the diversity of the investor base. Terrascend's issue was purchased mainly by large U.S. institutional investors while Gage completed its $50 Million funding with a predominantly high net worth investor base (except for the $20 million investment from JW Asset, a fund under joint leadership with TerrAscend). We don't believe the equity issuance spree is over. We note that Green Thumb updated their registration statement for potential issuance of up to 10 million subordinated shares (US$310 million at current prices), and Trulieve filed a short form shelf prospectus for issuance of up to C$750 million (approx.US$584 million) of mixed equity and debt securities. Of the ten market cap leaders, only Harvest Health and Planet 13 have yet to join the party. We expect issuance to broaden to the second-tier companies; however, as we have noted here before, the impediment is the vast valuation gap between the biggest and the next level cannabis companies. Still, if cannabis companies have learned anything, it is to take the money when it's offered.

Largest Equity Raise: On January 29th, 2021, TerraAscend Corp. TERTRSSF, the fifth-largest MSO by market cap, announced the closing of a C$224 million (US$174.6 million) non-brokered private placement of 18.12 million shares at C$15.70 (US$12.40) per share. The company disclosed that four large U.S. institutional investors purchased 80% of the issue. JW Asset Management and Canopy Growth continue to control the company.
- The shares were priced at a 4% discount to the pre-announcement level, keeping with the modest increase of 9% in shares outstanding.
- The transaction values TerrAscend at 7.0x consensus 2021 revenue and 17.4x 2021 EBITDA, compared to 4.9x revenue and 19.3x EBITDA for the 14 U.S. cultivation & retail sector companies we track with analyst estimates and over $100 million of market cap.
- The raise further bolsters TerrAscend's liquidity and leverage measures and provides a significant acquisition fund. We currently rank TerrAscend as the 9th most robust credit out of the 19 U.S. cultivation & retail sector companies we track with over $100 million of market cap. We expect the company's rankings to improve in coming quarters.

Aurora Cannabis closed the second-largest issue of the week through its closing of a US$137.9 million bought deal public offering 13.2 million units at US$10.45 per share.
- The units were priced at a relatively steep discount of nearly 16% relative to the closing price pre-announcement, despite the issue only increasing share count by approximately 8%. Investors have been disappointed by Aurora's continued need for outside financing and its delay in achieving positive EBITDA
- The transaction values Aurora at 5.6x consensus 2021 revenues and 61.8x 2021 EBITDA. The company's EBITDA multiple reflects the low 9% EBITDA margin that analysts expect Aurora to achieve in 2021
- The issuance does not fix Aurora's long term liquidity issue. The company's pro forma Viridian cash flow adjusted liquidity ratio is only .51, indicating a high likelihood of further fundraising requirements.

Public vs. Private Cap Raises: Nine of this week's ten capital raises were closed by public companies. Public companies raised approximately 97% of the capital year to date in 2021, about the same as last year. There has been a consistent trend towards public company capital raises, taking advantage of newly robust capital market conditions.

Public Company Listings: All nine public companies which raised capital are listed in Canada (5 on the CSE and 4 on the TSX). All nine are listed on other markets: (seven on the OTC, one on the NYSE, and one on the FSE).

Equity vs. Debt Cap Raises: Equity-based capital accounted for nine of this week's ten closed raises and 97% of raised proceeds.

Largest Debt Raise: On January 27th, Flower One Holdings Inc. closed a three-year US$10.1 million, unsecured convertible debenture unit offering, with a 9% coupon.
- The conversion price was set at US$.20 per share (at-the-money) with an unusual feature that limits conversion to the earlier of maturity or the date at which the stock trades at approximately US$.39.
- Each unit includes 75% coverage in warrants with a three-year life and an exercise premium of 50%.
- The effective cost of the financing is high at 20.1%, reflecting the weak financial condition of the company and the "rescue financing" nature of the transaction.
- The deal is part of broader debt restructuring, which included maturity extensions of the company's secured debt and a debt reduction of US$5.9 million through the conversion of portions of the company's secured debt to equity.
- The combination of transactions improves Flower One's leverage, but its debt/ market cap of 1.3x is still high. Most Importantly, the transactions significantly improve the company's near term liquidity.

Cap Raises by Sector: Seven of the ten companies that raised capital this week came from the Cultivation & Retail sector, with one from Hemp, Biotech/Pharma, and Infused Products & Extracts.

MERGERS & ACQUISITIONS

Transactional Activity: Four M&A transactions were completed this week, up from three in the prior-year period. We continue to see signs of accelerating M&A activity, with over $1 billion of announced deals still to close.

Largest M&A Transaction: On January 26th, Heritage Cannabis CANNHERTF, a development stage public company that grows, sells, and distributes medical cannabis, announced the closing of its acquisition of Premium 5 Ltd, a Canadian based producer of high quality concentrates.
- Total Consideration of US$35.25 million consisted of $19.5 million in cash and a $15.75 million earn-out payment.
- No financial information is available on the target company

In the week's second-largest deal, Harvest Health and Rec. HRVSF) completed a $23.8 million sales leaseback with Innovative Industrial Properties IIPR. The property is a 292,000 square foot cultivation and processing facility in Alachua, Florida, which Harvest is planning to expand. IIP will fund an additional $10.8 million in future tenant improvements.

Public vs. Private: This week's four acquisitions were made by public companies. With the recent surge in cannabis stock prices, we expect public companies to make add-on purchases of private companies using primarily its currency.

M&A by Sector: Two of the buyers in this week's transactions came from the Cultivation & Retail sector with, one from Investments/M&A and one from Hemp., Two of the targets came from Cultivation & Retail sector, one from Infused Products & Extracts and one from Hemp.

WEEKLY SUMMARY