June 9, 2021 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
- Transactional Activity: There were three fewer capital raises and a $319.2 million lower volume this week than in the prior week. Compared to the same week last year, five fewer transactions closed with a $32.0 million higher volume. The average deal size was $19.6 million this week vs. $7.1 million in the same week last year.
- The price of our basket of cannabis stocks was unchanged for the week.
- Total capital raised YTD in 2021 is approximately $262M lower than the same period in 2019.
- Largest Equity Raise: On June 1st, 2021, The Valens Company (TSXV: VLNS)(OTCQX: VLNCF) closed a bought deal public offering at US$2.73 per unit for total proceeds of US$38.1 million.
- $23 million of the proceeds will be used for opportunistic acquisitions, $4 million for Capex, and the balance for working capital and general corporate purposes.
- Each unit is composed of 1 common share and 1/2 warrant with a $3.44 exercise price (26% premium) and a three-year expiration.
- The warrants are worth approximately $.17 per unit, giving a net share price of $2.56, a 12.3% discount to the trading price before the deal announcement.
- The transaction implies a $353 million enterprise value which equates to 3.6x 2021 consensus revenues estimates, roughly in line with the 4.2x median we calculate for Canadian Infused Products companies with market caps under $1 billion.
- Valens’ key credit stats proforma for this raise are a bit better than its peer group. As measured by debt/ market cap, Leverage is .04x versus the median peer group number of .09x. Liquidity is buoyed by this raise, bringing the company’s cash flow adjusted current ratio to 4.2x, significantly better than the peer group median of -.04.
- Public Company Listings: Both public companies that raised capital this week are listed in Canada (one on CSE and one on TSX). In addition, both trade on OTC.
- Equity vs. Debt Cap Raises: Equity-based capital accounted for all this week’s capital raises.
- Largest Debt Raise: There were no closed debt raises this week.
- We continue to believe that debt financing is now the wisest corporate finance strategy for the major MSOs. Our reasoning is:
- Equity valuation multiples have come down from their peaks. On a historical basis, they may still be attractive from an issuer’s point of view. But suppose you believe that legalization will happen in the relatively near term and produce a significant run up in the market. In that case, it makes sense to delay selling additional equity.
- Debt costs have come down significantly. Major MSO’s can raise debt with single-digit all-in costs, frequently with no equity kickers.
- Most importantly, much of cannabis debt has low or no prepayment penalties giving issuers valuable optionality to react to equity market changes. We believe that even if debt providers require short non-call periods or prepayment penalties, it is probably money well spent.
So why haven’t we seen more debt issuance? The answer lies in the table below, which shows that the top 10 MSO’s, proforma for publicly released data on capital raises and cash M&A consideration, now have more than $2 billion of cash. For the most part, the MSOs are more worried about spending cash than raising it.
- Cap Raises by Sector: One of the companies that raised capital this week came from the Cultivation & Retail sector, and the other came from Infused Products & Extracts.
MERGERS & ACQUISITIONS
- Transactional Activity: Seven M&A transactions were completed this week, compared to none in the prior-year period. We have tracked 144 transactions YTD in 2021, compared to 32 in the same period last year. Public companies were the buyers in 83% of 2021 deals YTD compared to 91% in 2020.
- The volume of closed M&A transactions targeted at U.S. companies YTD is $2.8B, 66% ahead of the previous record year in 2019. However, the chart below shows that two non-U.S. megadeals ($7B Jazz/GW Pharma & $4.5B Tilray/Aphria) dominate consideration volume YTD.
- Most Interesting M&A Transaction: Last week, Hydrofarm Holdings Group Inc. (NASDAQ: HYFM) closed its acquisition of House & Garden Inc., Humboldt Wholesale, Allied Imports & Logistics, and South Coast Horticultural Supply Inc. (collectively “House & Garden”)
- Consideration of approximately $125 million was paid in cash, using a portion of the $326 million from the company’s May equity raise.
- The purchase price represents approximately 2.3x House & Garden’s projected 2021 sales and less than 7x projected 2021 Adjusted EBITDA.
- Looking at the equity raise and acquisition together, we find the deal to be 46% accretive in terms of EBITDA per share.
- With transactions like this available to the company, it is no wonder that it is in acquisition mode, and it is not alone.
- The chart below shows that the Agriculture Technology sector has registered record equity capital raises YTD and a record number of M&A transactions with sector participants as targets.
- Although Hydrofarm has been the largest capital raiser ($326 million of the $528 million raised to date), it is a distant second in the M&A game. GrowGeneration has been the buyer in 8 of the 13 deals YTD, with Hydrofarm completing two. We expect to see more of Hydrofarm’s cash put to work in additional acquisitions in the rest of 2021.
- Public vs. Private: Five of this week’s seven acquisitions were made by public companies.
- M&A by Sector: The buyers and sellers in this week’s seven 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
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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Viridian Capital Advisors (www.viridianca.com) is a financial and strategic advisory firm dedicated to the cannabis market. We are a data- and market intelligence-driven firm that provides investment, M&Amp;Amp;A, corporate development, and investor relations services to emerging growth companies and qualified investors in the cannabis sector. Our banking practice, through broker-dealer Bradley Woods & Co. Ltd. (Member FINRA/SIPC), provides capital and M&Amp;Amp;A services to fund the growth of our clients, while our advisory practice helps to position and build their businesses. Our team’s decades of high level operating and transactional experience on Wall Street in a variety of emerging sectors, allows Viridian to provide comprehensive strategic and financial solutions that assist cannabis enterprises in realizing their full potential.
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