$65.6M Equity Offering Led By Good Day Farm Signals M&A Activity - What's The Big Picture?

Executives and investors linked to Good Day Farm, a prominent marijuana multistate operator (MSO), are engaging in a significant financial maneuver with plans to raise $65.6 million.

This equity offering, spearheaded by NOLA PharmaHoldings aims to bolster its presence in Louisiana’s medical cannabis market with additional sites in Arkansas, Florida, New York and Texas.

SEC Filing Details

A recent filing with the U.S. Securities and Exchange Commission (SEC) in May revealed that NOLA PharmaHoldings has already raised $48.1 million. MJBizDaily reported that the company, incorporated in Louisiana, operates out of an Arkansas location, emphasizing its multi-state operational base. Alex Gray, the CEO of NOLA PharmaHoldings, also serves as the chief strategy officer and president of sales at Good Day Farm, further linking the two entities.

The SEC filing discloses significant overlaps in leadership between Good Day Farm and NOLA PharmaHoldings. Notably, Good Day's CEO Terry Fitch and Reid Dove, a board member and owner of Good Day Farm Arkansas, serve as directors at NOLA PharmaHoldings.

Corporate Strategy

Good Day Farm's strategy includes operating retail locations across Arkansas, Mississippi and Missouri, and serving as a cultivation contractor in Louisiana. The company's integration in Louisiana was solidified when Republican Governor Jeff Laundry transferred two medical marijuana cultivation licenses to Good Day Farm and Ilera Holistic Healthcare in May.

Good Day Farm is deeply embedded in local politics, with primary shareholder Donald “Boysie” Bollinger being a notable Republican donor, and Good Day president John Davis married to state Rep. Paula Davis, reported Chris Casacchia for MJBizDaily.

Valuation Disparities And M&A Trends

According to Viridian Capital Advisor’s analysis, Tier 1 multi-state operators (MSOs) like Curaleaf Holdings CURA, Green Thumb Industries GTBIF, and Trulieve Cannabis TCNNF are seeing a widening valuation gap compared to smaller entities, reaching a three-year peak. This valuation disparity is making M&A activities increasingly beneficial for larger entities, allowing them to acquire smaller companies at a cost-effective rate relative to their market values.

Cost Of Capital And Market Dynamics

The differential in capital costs is becoming more pronounced, favoring larger, publicly traded Tier 1 MSOs. They now enjoy lower fundraising costs compared to their smaller counterparts, enhancing their bargaining power in deal-making. This financial advantage is expected to drive a robust consolidation period in the cannabis industry, especially as smaller firms, burdened by prolonged market challenges, consider exit strategies.

The analysis by Viridian highlights a strategic shift towards using equity for financing M&A activities, rather than accumulating debt. This approach is particularly advantageous in the current slow pace of banking reforms and legislative updates, making cash acquisitions costly and challenging.

Larger companies are opting to use their elevated stock as currency for acquisitions, preserving cash for operational needs and reducing new debt risks. This method, however, must be managed to avoid excessive shareholder equity dilution, which could negatively impact stock prices.

Financial Health And Debt Restructuring

A parallel report by Zuanic & Associates sheds light on the financial health of MSOs, identifying potential candidates for equity raises or debt restructuring based on their net debt metrics. For instance, Trulieve and Curaleaf are highlighted due to their significant net debt levels, which are assessed against their sales, EBITDA, and operating cash flow to gauge their debt servicing capabilities.

The concept of broad net debt is expanded in this analysis to include additional liabilities like income tax payables and warrant derivative liabilities, further revealing the financial pressures on companies like Cresco Labs CRLBF and Trulieve. The report suggests that, with such financial landscapes, equity raises might be a necessary move for some MSOs, while others might need to consider restructuring their debt, given the challenging conditions of high net interest costs and limited access to equity markets.

These investing issues will be a hot topic at the upcoming Benzinga Cannabis Capital Conference in Chicago this Oct. 8-9. Join us to get more insight into what the wave of weed legalization means for the future of investing in the industry. Hear directly from top executives, investors, advocates, and policymakers. Get your tickets now before prices go up by following this link.

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