March 22, 2023 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Four capital raise transactions with total disclosed proceeds of $4.4M closed this week. One more transaction closed than last week, and the volume was up by $1.9M. One less transaction closed as the previous year, and the volume decreased by $109.8M. This week’s average deal size was $1.1M compared to $22.8M last year.
Cannabis capital raises are off to a multi-year low. Only $544.97M closed through the first eleven weeks of the year compared to $1,151.51M last year. Debt represents 53.1% of total capital raised.
Public companies have raised only 65.1% of total capital YTD, down from 79.1% last year.
YTD, U.S. Cultivation & Retail sector capital raises are down 86.2% from 2022.
Debt is still the only game in town, accounting for 89% of all cultivation sector capital raised. The vast majority of the debt raised has been for public companies.
Large transactions are still absent from the market. There have been no debt or equity deals over $100M YTD.
Cannabis equities (as measured by the MSOS ETF) were down 2.6% for the week, and most of the companies we track are trading near their 52-week lows.
The banking crisis continues to unfold. This week’s surprise was the shotgun wedding of UBS and Credit Suisse. UBS appears to have gotten an excellent deal, evidenced by its stock rise since the weekend. The domestic panic isn’t over, however. First Republic Bank (FRC: NYSE) hired Lazard to search for a buyer, but buyers are apparently balking at the prospect of stepping up without a government backstop. Several major banks, including Chase, deposited funds in a show of confidence, but this has done little to quell the fear of continued deposit leakage.
Although this may not directly impact cannabis, a continued bank panic could be the shock that brings on the long-awaited recession.
The bank panic complicates the Fed’s moves against inflation. We do not believe the Fed CAN back off from at least a 25bp rate increase. We reason that reversing course after issuing such Hawkish guidance would signal to the market that the Fed believes the economy is quickly turning south. It’s hard to predict what that message would do to consumer confidence.
We have seen no follow on announcements regarding other MSOs following TerrAscend to the TSX. As we suggested last week, the path is not easy, and the benefits of a TSX listing may not be worth the unforeseen consequences.
Lowell Farm has entered into an LOI for an intriguing solution to its debt/liquidity issues. The company has approximately $23.7M of debt maturing in October 2023 and a market cap of only $7M a mix which appears to preclude a simple refinancing of the debt in the current climate. Accordingly, the company hired Canaccord in January to “view strategic options,” code for finding a buyer. No buyer came forward, and the stock has become one of the worst performers in cannabis, falling more than 60% YTD.
The announced plan has the company getting rid of its debt in return for 100M shares and IP for several of its top brands.
Essentially, this is a debt/equity swap, a tried and true debt restructuring tool. We are working on valuing the deal and will report to tracker readers as we proceed. Preliminarily we would look at the company’s $7M market cap and add $24M of debt relief to get $31M. The new share count would be approximately 191M + 100M= 291M. This math gives us a value of 100M shares of only around $10.6M. But that is not subtracting any value for the brands. The bottom line is that we are not yet clear on how this math works.
YTD Returns by Public Company Category
The relative ordering of YTD returns by category is mostly unchanged from last week, except for U.S. Tier 1 MSOS, which have lost two ranking notches since the previous week. The best-performing categories continue to be tier 2 and 3 U.S. MSOs.
Best and Worst Performers of the last week and YTD
Lowell Farms (LOWL: CSE) was the week’s biggest loser, down 24.9% on the news of the company’s LOI to settle its debt in return for 100M shares and several of its brands.
On March 15, 2023, Zelira Therapeutics Ltd (ZLD: AUX)(ZLDAF: OTCQX), an Australian based Biotech company focused on R&D and development of cannabinoid medicines and product commercialization, raised $1.17M from U.S. Investors.
1.77M shares were sold at $.66 per share, approximately a 3% discount to the 15-day VWAP and equal to the stock’s last closing price.
The issue implied a market cap and enterprise value of $47.6M and $46.5M, respectively. The company is pre-revenue and trades at approximately 2.0x book value, a metric that corresponds closely to the 2.09x market/book ratio we observe for the 9 Biotech companies in the Viridian Value Tracker database with market caps between $25-100 and annualized revenues less than $20M.
Proceeds will help fund the company’s clinical trial program. Zelira’s free cash flow adjusted current ratio of -4.4x indicates a significant need for additional financing, primarily due to its approximately $5M negative annualized cash flow from operations.
Public vs. Private Raises:
Three of this week’s four capital-raising companies are public. All three trade in the U.S. on OTC. In addition, one trades on the Australian exchange, one on the London exchange, and one in Canada on the TSX.
Equity vs. Debt Cap Raises:
Equity accounted for 41.9% of the capital raises this week.
Debt accounted for 70% of trailing 4-week capital raises. We expect this ratio to be volatile because of the limited capital raise activity. Debt should continue to be over 50% of capital raised, especially since many companies are trading at or close to their 52-week lows. Since year-end, debt costs have significantly increased because of higher treasury rates and risk spreads. We expect continued increases in equity-linked structures.
On March 14, 2023, Jupiter Research, LLC, a subsidiary of Tilt Holdings ( TILT: NEO)(TLLTF: OTCQX), amended its existing $10M asset-based revolving credit facility to increase the amount to $12.5M and extended the maturity date to July 21, 2024.
The facility is secured by Jupiter’s inventory, accounts receivable and other assets: intelligent use of non-plant touching collateral.
Tilt’s relative ranking in the Viridian Credit Tracker model has declined since our last discussion of the company in February. The chart below shows that the company now ranks #9 of the 13 U.S. Cultivation & Retail companies with market caps between $10M and $75M. The company’s liquidity ranking is unchanged; however, a decline in funds from operation to liabilities and an increase in total liabilities to market cap has punished the leverage ranking moving the company from #4 in February to #7 currently.
MERGERS & ACQUISITIONS
One M&A transaction closed this week for $13M compared to six transactions for $19.66M in the prior year.
Twenty-nine transactions totaling $741.81M have closed YTD, compared to fifty-six transactions for $2,031.16M last year.
The 2023 YTD average transaction size of $25.60M is the lowest in recent years.
Major Pending Deals Risk Arb
The Cresco/Columbia deal spread narrowed by 1040bp to 65.2% on 3/17/23. Still, a 65.2% arb spread screams skepticism that the agreement will survive as presently structured. An unannualized rate of return of over 65% for a four-month investment seems too good to be true. If you think this deal will close, as does one noted sell-side analyst we respect, then why wouldn’t you try to establish the arb position of being long Columbia and short Cresco?
The valuation gap narrowed to 1.74 on 3/17/23 and remained close to the lowest measure since we began tracking this measure. 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 to the greater trading liquidity of the larger companies. We believe the current gap is understated by the massive illiquidity of cannabis stocks which may not be accurate indicators of the prices at which the entire companies would trade.
The Most Interesting Closed M&A Deal of the Week:
On March 13, 2023, MariMed (MRMD: CSE)(MRMD: OTC), the 12th largest U.S. MSO by market cap, acquired the assets of Ermont, Inc., a vertically integrated Massachusetts medical cannabis company with one dispensary in Quincy, MA, and one cultivation facility.
The transaction consideration was $13M. However, the composition of the payment was not disclosed.
Ermont was in receivership due to a default on a $22M obligation under a secured loan agreement with Teneo Funds SPVi, LLC.
MariMed’s ability to purchase the assets for under 60% of the book value of the outstanding debt appears to be an exceptional bargain.
MariMed is applying with the state cannabis commission to convert the dispensary to adult use, which would significantly increase the value of the dispensary.
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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