March 29, 2023 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
One capital raise transaction with total disclosed proceeds of $0.9M closed this week. Three fewer transactions closed than last week, and the volume was down by $3.5M. One less transaction closed as the previous year, and the volume decreased by $55.8M. This week’s average deal size was $0.9M compared to $28.3M last year.
Cannabis capital raises are off to a multi-year low. Only $545.88M closed through the first twelve weeks of the year compared to $1,208.17M last year. This week’s total capital raise volume is the lowest since the May 11, 2020. The trailing 4 week volume is the third lowest since June 2019 with the other two lowest weeks also occurring in 2023.
Debt represents 53.0% of total capital raised.
YTD, US Cultivation & Retail sector capital raises are down 86.2% from 2022.
Debt is still the only game in town, accounting for 89.4% 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 7.5% for the week, and most of the companies we track are trading near their 52-week lows.
The banking crisis is on hold. The market was temporarily calmed by First Citizens Bank buying $72B of Silicon Valley Bank assets at a discount of around $16.5B, with the FDIC agreeing to share in some of the gains or losses from the loans purchased. Still, the fate of First Republic Bank (FRC: Nasdaq) hangs in the balance. Regulators announced on Tuesday that the bank was no longer for sale, leaving the market to parse the meaning of that revelation.
As expected, the banking crises did not keep Jay Powell from increasing rates by 25 bp. Interest rate futures now predict rate cuts in the latter half of 2023 with the rationale that significant cuts will be required to forestall the impact of an impending recession. We are not convinced that Powell will blink, however. The 3-month/10 year spread curve below shows an inversion unmatched in the last 20 years. Note that it is not the deep inversion that has signaled each of the previous five recessions; the reversal of the inversion typically gives a 6-9 month recession indicator. The 2-10 curve has become less inverted, which may be the beginning. Buckle up. We’ve never seen a curve like this one.
MSOs continue to tighten their reigns to conserve cash. This week’s announcement that Curealef is closing a facility in New Jersey and laying off 40 people was a bit of a surprise to us. After all, NJ has some of the highest cannabis prices in the nation and seemed to be the poster child of new market profitability. It shows what we have talked about here for some time: the period of extreme profitability between when a market first goes rec and when wholesale pricing begins to fall is shortening.
Pricing gains in Michigan and California offer hope that market consolidation might yield more price stability. But it may be a case of too little and too late in both markets. Skymint, one of the two largest integrated operators, is in receivership with an uncertain future in Michigan. The second largest operator, TerrAscend (TER: CSE), has also been burned by Michigan. TER purchased Gage and Pinnacle for a combined total of $353M and just took a $311M writedown. In California, pricing is firming after nearly 1000 cultivation licenses failed to renew. Many dispensaries continue to operate on the edge. The stage is set for consolidation, but everyone wants to be a settler, not a pioneer
YTD Returns by Public Company Category
The relative ordering of YTD returns by category is mostly unchanged from last week, except for US Tier 1 MSOS, which have lost another ranking notch since the previous week. The best-performing categories continue to be tier 2 and 3 U.S. MSOs. Eight of our eleven categories are now showing YTD losses.
Best and Worst Performers of the last week and YTD
Nearing the end of Q1, the top 3 performers YTD are:
Tilt Holdings (TILT: NEO), up nearly 70% through its active liability management actions, which substantially cured its potential liquidity crises.
Glass House Brands (Glasf-OTC) is up 47% YTD on cost efficiency improvements and increased California pricing.
Scotts Miracle Grow (SMG: Nasdaq) continues to hold on to a 38% YTD gain despite guidance that its Hawthorne business will likely experience a 20-25% revenue decline in 2023. Hawthorne also shows high year-end inventories (over 190 days), portending additional margin declines.
The three worst performers YTD are:
Lowell Farms (LOWL: CSE) is down 57% YTD despite a 33% gain this week on news of an agreement with George Allen under which the company will eliminate its near-maturity convertible debt in return for issuing 100M shares and transferring ownership to some critical IP. Although the basic idea of a debt-for-equity swap makes excellent sense, we have not been able to come up with a valuation for the post-transaction shares that makes sense and brand IP value that balances the canceling of the debt.
Stem Holdings (STMH: CSE) is down 49% YTD after it announced a merger transaction with Headwaters LLC which will result in equity holders of Headwaters owning approximately 80% of the combined firm.
AYR Wellness (AYR.A: CSE) is down 44% YTD on 11.5% YTD reductions in consensus 2023 EBITDA estimates and concerns regarding the company’s sizeable 2024 debt maturities. Still, the company is progressing in building liquidity by canceling planned acquisitions and completing asset sales.
The Week’s Only Closed Equity Transaction:
On March 21, 2023, Avicanna (AVCN: TSX)(AVCNF: OTCQX), a commercial-stage biopharmaceutical company focused on the development and commercialization of cannabinoid-based products), closed a $0.9M private placement of units.
Each unit, priced at $.29, is comprised of one common share and 1/2 share warrant with an exercise price of $.36 (25% premium) and a 3-year life. The warrant package is worth approximately $.024 per unit.
The transaction implies an enterprise value of approximately $26.2M and an EV/LTM Revenue of 8.1x. The company’s SG&A is running over 1 1/2 times its revenues, but its shares are up sharply on news of a partnership with Shoppers Drug Mart.
It appears that Avicanna will need to do additional financing during 2023. Its cash flow adjusted current ratio, which considers its annualized negative free cash flow of around $8M, is -.22, indicating a potential liquidity challenge.
Public vs. Private Raises:
Avicanna, this week’s only capital raiser, trades on the TSX in Canada and the OTC in the US.
Equity vs. Debt Cap Raises:
Equity accounted for 100% of the capital raises this week.
Debt accounted for only 4% 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.
The Week’s Largest Debt Issues
There were no closed debt transactions this week.
MERGERS & ACQUISITIONS
Three M&A transactions closed this week for non-disclosed value compared to one transaction in the prior year.
Thirty-two transactions totaling $741.81M have closed YTD, compared to fifty-seven transactions for $2,031.16M last year.
The 2023 YTD average transaction size of $23.18M is the lowest in recent years.
Major Pending Deals Risk Arb
The Cresco/Columbia deal spread narrowed by 330bp to 61.9% on 3/24/23, an impressive performance given the general feel of the cannabis market. Still, a 61.9% arb spread screams skepticism that the agreement will survive as presently structured because that return over a four-month horizon 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 widened to 1.94 on 3/24/23 but remained close to the lowest 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 20, 2023, eBottles (Private), a premier supplier for the development and distribution of premium cannabis packaging materials with a customer list that includes 8 of the 10 top MSOs, completed its acquisition of the concentrates packaging line of products from Greenlane Holdings (GNLN: Nasdaq).
Consideration and terms were not disclosed.
eBottles is a designer, developer, marketer, and distributor of proprietary child-resistant packaging for the cannabis industry.
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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