August 25, 2021 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
- Transactional Activity: There were four fewer capital raises and a $139.6 lower volume this week than in the prior week. Compared to last year’s same week, two fewer transactions closed with a $57.9 million higher volume. The average deal size was $27.4 million this week vs. $8.6 million in the same week last year.
- Equity raises continued at a moderate pace, with the $101M IPO of NewLake Capital Partners taking center stage. The lone debt deal was a $1.4M secured term loan for Avicanna, which was unusual for its low coupon but extremely high effective cost.
- Cannabis stocks were up down 6.3% for the week, according to the Alternative Harvest ETF. Our graph of the week copied below shows that all plant-touching sectors have traded off significantly since the July 14th unveiling of the Schumer/Booker proposal.
- Total capital raised YTD in 2021 of $8.39B is now approximately $1.43B lower than the same period in 2019; however, U.S. capital raises are far more robust. U.S. equity raises are up 25%, and U.S. debt is up 51%. Canadian raises are off sharply, with equity raises down 54% and debt down 24%.
- Largest Equity Raise: On August 20th, 2021, NewLake Capital Partners completed its initial public offering of 3.9M shares at $26 per share for gross proceeds of approximately $102M. NewLake is a leading provider of real estate capital to cannabis companies. The triple-net lease REIT purchases properties and leases them to state-licensed U.S. cannabis companies.
- As of June 30, 2021, NewLake’s portfolio is diversified across ten states, but approximately 93.8% of annualized rental revenues were derived from Massachusetts, Illinois, Florida, and Pennsylvania, with the highest concentration of 27.7% in Massachusetts.
- NewLake rents to the top tier of cannabis operators. All of its rental contracts as of June 30, 2021, were with eight tenants, with the largest three, Curaleaf (29%), Cresco (19.3%), Revolution Clinics (15.7%), Columbia Care (12.2%), and Trulieve (11.8%) accounting for 88% of annualized rentals.
- NewLake’s properties are 100% leased, and no leases are expiring until 2029.
- Public Company Listings: Three of the four companies that raised capital this week were public. Two trade in Canada (one on the CSE and one on the TSX) and three in the U.S. on the OTC.
- Equity vs. Debt Cap Raises: Equity accounted for three of the four raises and 98.7% of capital raised.
- Largest Debt Raise: On August 19th, 2021, Avicanna Inc. closed a previously announced $1.4M secured term loan financing.
- 5% coupon with 15% OID.
- 14-month term.
- 100% coverage with warrants at 25% premiums.
- The combination of large OID and 100% warrant coverage leads to a very high cost of capital of approximately 32%.
- Cap Raises by Sector: This week’s four capital raises all came from different sectors: Infused Products and Extracts, Cultivation & Retail, Real Estate, and Biotech/Pharma.
MERGERS & ACQUISITIONS
- Transactional Activity: Nine M&A transactions were completed this week, compared to two in the prior-year period. We have tracked 212 transactions YTD in 2021, compared to 53 in the same period last year. Public companies were the buyers in 84% of 2021 deals YTD compared to 92% in 2020.
- There have been 147 US targeted M&A transactions YTD with a record $5.5B in total consideration.
- Largest M&A Deal of the week: On August 16th, 2021, Village Farms Inc.,(Nasdaq: VFF)(TSX: VFF), the sixth-largest Canadian L.P. by market cap, completed its acquisition of Balance Health Botanicals, a top-five market share U.S. developer and seller of CBD based health and wellness products.
- The $75 million consideration for the deal was paid through $30 million in cash and Village Farm shares valued at $45 million.
- The transaction marks the latest investment by a Canadian L.P. in U.S. non-THC assets to establish a beachhead for THC product sales post federal legalization.
- VFF already has a significant U.S. presence as a leading fresh produce supplier to grocery and large-format retailers.
- The company plans to convert its 5 million sq ft hi-tech greenhouse facility in WestTexas to cannabis cultivation post-legalization.
- Most interesting Deal of the week (not yet closed): On August 17th, 2021, Tilray. (Nasdaq: TLRY)(TSX: TLRY), the second-largest Canadian L.P. by market cap, announced a transaction to gain a substantial minority interest in U.S. cannabis retailer MedMen in a complicated transaction reminiscent of Canopy’s investment in Acreage.
- Tilray and other strategic investors formed an SPV to acquire approximately 75% of the outstanding senior convertible notes and 65% of the Facility Warrants from Gotham Green Partners (“GGP”)
- The SPV will own approximately $165.8 million principal amount of the notes and about 135.3M warrants. The notes have a weighted average conversion price of $.24 per share, and the warrants have a weighted average exercise price of $.2357 per share.
- Tilray has a 68% interest in the SPV, giving it an economic interest in $112.7M notes and 92.0M warrants. The table below shows that this would provide Tilray an approximate 21% ownership of MedMen. By simple math, we get that the total SPV would own approximately 30.9% of MedM
- In exchange for this contingent ownership position, Tilray agreed to issue approximately 9 million Tilray shares to GGP. This issuance requires shareholder approval because Tilray is running low on authorized shares. If Tilray fails to get shareholder approval by December 31st, 2021, GGP has the right to receive cash.
- Total consideration for the deal is $120.7 million (9M shares at $13.41/Sh). This price imputes a market cap of $574M for MedMen.
- The existing senior convertible notes will be modified in several ways:
- On August 17, 2021, MedMen also agreed to sell $100M of units to Serruya Private Equity Group.
- 416.7M units at $.24 per unit for gross proceeds of $100M.
- Each unit consists of 1 share, and 1/4 warrant with a $.288 exercise price and a five-year life.
- Short-term warrants (1 year) allow investors to pay $30M to acquire $30M in convertible notes with a conversion price of $.24. Proceeds from the exercise of these warrants will pay down debt.
- We value the embedded options in this deal at a total of $8.7 million ($5.1M for the unit warrants and $3.6M for the short-term conversion options). We calculate a net share price of $.219 per share, a discount of 17.7% from the $.266 share price on the day before the transaction. This discount strikes us as reasonable given the circumstances of the sale.
- The stock market reacted positively to the announcement, but we have a different view:
- Tilray is paying too high a price for its investment in MedMen. The implied enterprise value for MedMen is approximately $813M (assuming conversion of all $165.8M notes held by the SPV. As shown in the graph below, we calculate an implied E.V. / 2022 consensus revenue of 4.54x. Every competitor on this list has as good or better growth prospects as MedMen and better profitability. We are hard-pressed to understand a valuation near the top of the group. Perhaps the optionality/safety of owning a debt instrument rather than straight equity is worth something, but not this much.
- The $100M infusion from Serruya is helpful, but we question whether it will provide enough liquidity to get MedMen to cash flow self-sufficiency. MedMen’s cash flow from operations in its March quarter was -$14.7 million, and it also has considerable CAPEX requirements to complete its planned stores. The $100M may be enough, but we would not be surprised to see additional dilutive issuance.
- We believe this will be dead money for quite a while. We do not think we are on the cusp of federal legalization, and therefore this will represent a non-cash-earning asset on Tilray’s books (albeit a relatively small one) for at least several years.
- Despite the progress MedMen’s management has made in turning around the business, the company has lost its market leadership position and now is just another mid-sized MSO. The company does have some excellent locations, including its soon-to-open Fenway dispensary, but it is not the market leader it once was perceived to be.
- The acquisition will not get Tilray very far in its pursuit of $1.5B of U.S. revenues. Consensus estimates have MedMen at less than $200M for 2022. Furthermore, we distrust the strategy of quadrupling revenues through acquisitions. We understand Tilray’s desire to enter the U.S. market; its 8% consensus 2022 EBITDA margin tells you everything. Irwin clearly understands that they cannot support their current market cap without massive revenue and profit increases, and MedMen may well have been the only play available. It just doesn’t make a big enough difference to matter.
- It is interesting to consider Gotham Green’s motivation for this transaction. We are reminded of the old saying that if you are sitting at a poker table and after looking around, you can’t figure out who the chump is, then it’s you. And frankly, we do not see GGP as the chump here.
- GGP undoubtedly stubbed its toe on MedMen, but its strategy has been quite clear for some time: conserve optionality by maintaining a secured debt position while continually negotiating higher conversion positions in the company. Where necessary, it has been willing to provide extra liquidity to keep that optionality alive.
- What was the endgame? We believe GGP was holding on, hoping that federal legalization would happen and a rich dumb investor would pay up for the chance to take over MedMen. Some cracks in their certainty began to be apparent with the sale of the New York assets in the face of an imminent adult market conversion.
- But along comes Tilray, willing to pay a high multiple, years ahead of legalization. We imagine a big grin on Jason Adler’s face, and we don’t think he would mind taking the cash instead of the 9M Tilray shares.
- Public vs. Private: Seven of this week’s nine acquisitions were made by public companies.
- M&A by Sector: The buyers and sellers in this week’s deals were from the following sectors:
The Viridian Cannabis Deal Tracker is a proprietary information service that monitors capital raise and M&Amp;Amp;A activity in the legal cannabis and hemp industry. Each week the Tracker aggregates and analyzed all closed deals and segments each according to key metrics:
- Industry Sector (One of 12 sectors, from Cultivation to Brands)
- Dollar value of the transaction
- Region in which the deal occurred (Country or U.S. State)
- Status of the company announcing the transaction (Public vs. Private)
- Deal structure (Equity vs. Debt)
- Key deal terms (Pricing and Valuation)
The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&Amp;Amp;Amp;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&Amp;Amp;Amp;A transactions totaling over $45 billion in aggregate value.
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