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Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry October 25th – October 29th, 2021

November 3, 2021 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS

CAPITAL RAISES

Transactional Activity: There was one fewer transaction but a $40.1.3 million higher volume this week than in the prior week. Compared to last year’s same week, two more transactions closed with a $157.3 million higher volume. The average deal size was $29.3 million this week vs. $12.8 million in the same week last year. Overall deal activity was thin, particularly on the equity side, where the most significant issue was the $5.8M Series A funding of Italian solventless extraction technology company Herbolea.

Four equity issues were closed for total proceeds of $7.1 million, 82% of which was made up by the Herbolea funding.

Four debt issues closed this week for a total proceed of $227.3 million, led by a $125 million Hydrofarm secured term loan and a $100 million Jushi credit facility.

Cannabis stocks were sharply lower for the week, down 4.6% as measured by the AdvisorShares Pure US Cannabis ETF. The ETF is down 47.8% from its February 19th peak and is now at its lowest since October 30, 2020. Year-to-date, cannabis stocks are down 25.8%, while the S&P 500 is up 22.6%.

HEXO (Nasdaq: HEXO was the hardest hit, down 15% for the week after posting results that included a going concern qualification and discussing the need to obtain modifications on the $360M convert it issued in June to finance the Redecan acquisition.

Big gainers and losers for the week included:

Total capital raised YTD in 2021 of $10.88B is now approximately $.13B lower than the same period in 2019 (the previous peak year); however, US capital raises are far more robust. US equity raises are up by $817M (21%), and US debt raises are up by $1,468M (138%) compared to 2019. Canadian raises are off sharply, with equity raises down 48% and debt down 12%.

Largest Equity Raise: On October 26, 2021, Herbolea, an Italian solventless extract technology company, announced that it had closed a $5.8M Series A round.

  • Herbolea currently operates extraction equipment in The US, Germany, Thailand, and Italy.
  • One-half of the proceeds is conditioned on milestone achievements.
  • European pharmaceutical cannabis specialist fund Oskare Capital led the round. Oskare targets innovative companies across the cannabis value chain but does not invest in cannabis production or recreational cannabis.
  • Proceeds will be used to accelerate growth and extend access to the US market.

Public Company Listings: Five of the eight companies that raised capital this week were public. Four trade in Canada on the CSE and four trade in the US (three on OTC and one on Nasdaq).

Equity vs. Debt Cap Raises: Equity accounted for four of the eight raises and 3.0% of capital raised.

Largest and Most Interesting Debt Deal: On October 26, 2021, Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) announced the closing of a new $125 million senior secured Term Loan.

  • Interest at either LIBOR (with a 1% floor) plus 5.5% or alternate base rate (with a 2% floor) plus 4.5%.
  • Seven-year maturity.
  • Proceeds used to repay borrowings under the existing revolver and fund future acquisitions, including the IGE deal.
  • JP Morgan was the sole arranger and agent.
  • HYFM, as a non-plant-touching company, is an excellent example of how much lower the cost of MSO debt could go post-legalization or re-scheduling. Hydrofarm’s 6.5% rate is a full 150bp lower than the Verano financing we discussed last week.
  • The Viridian Credit Tracker ranks Hydrofarm as the best credit of the 22 Agriculture Technology companies we track. Still, when stacked up against the large MSOs, Hydrofarm places third, ahead of Curaleaf (CSE: CURA) and Verano (CSE: VRNO), but behind Trulieve (CSE: TRUL) and Green Thumb (CSE: GTII).

Hyrdrofarm’s non-plant-touching status does not reduce its close ties to the cultivation business, and as a credit, it doesn’t trade as well as it would if its customers were federally legal. It does, however, give us a glimpse of the future of cannabis debt.

Cap Raises by Sector: Companies raising capital this week came from a diverse list of sectors.

MERGERS & ACQUISITIONS

Transactional Activity: We tracked only three closed M&A transactions this week, compared to one in the prior-year period. We have chronicled 268 transactions YTD in 2021, compared to 72 in the same period last year. Public companies were the buyers in 85% of 2021 deals YTD compared to 89% in 2020.

There have been 187 US targeted M&A transactions YTD with a record $8.3 Billion in total consideration. Both transaction numbers and total consideration exceed the values recorded in each of the last two full years.

One of the key drivers of the M&A wave has been increased deal sizes, as shown below. Note: $ consideration for non-cultivation targets YTD is approximately 2x all previous full-year amounts. Cultivation has reached a record 83.3% of total US M&A Consideration in the second half of 2021.

Most Interesting M&A Deal of the week: On October 26, 2021, Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) announced an agreement to acquire Illinois-based Innovative Growers Equipment, Inc. (IGE), a manufacturer of horticulture benches, racking, and LED lighting systems.

  • Total transaction consideration of $58 million consists of $11.6M in HYFM common stock and $46.4M in cash.
  • Transaction price equates to 1.21x IGE’s 2021 estimated sales of $48 million and 7x 2021 adjusted EBITDA of $8.29 Million.
  • The transaction is another example of the big vs. small company acquisition arbitrage we have previously discussed. Hydrofarm is trading at 2022 multiples of 2.14x revenues and 14.5x EBITDA, while its target trades a 1/2 those multiples. Primarily because of this valuation gap, the IGE deal would be EBITDA per share accretive even if entirely funded with equity and assuming IGE’s 2022 EBITDA doesn’t increase from 2021.
  • The acquisition is the latest in a string of 5 acquisitions HYFM has concluded in 2021. But despite these accretive transactions, HYFM has underperformed the broader cannabis market since the beginning of the year. Analysts have recently downgraded their 2022 estimates based on the impact of a slowdown in cannabis growing activity in California and Canada.
  • We expect the company to continue to use a high percentage of cash in its acquisitions, and Hydrofarm’s low debt cost makes this strategy more attractive

Public vs. Private: Two of this week’s three acquisitions were made by public companies.

M&A by Sector: The buyers and sellers in this week’s deals were from the following sectors:

VIEW DEAL TRACKERS

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.

*Copyright (C) 2021 by Viridian Capital Advisors

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the publisher. No part of this material may be (I) copied, photocopied, or duplicated in any form, by any means, or (II) redistributed without Viridian’s prior written consent.

*Disclaimers

The information contained herein is for informational purposes and is not intended as a research report. It should not be construed as Viridian recommending investment in cannabis companies or as a solicitation to buy or sell any security or engage in a particular investment strategy. Investment in cannabis companies entails substantial risk. Before acting on any information, you should consider whether it is suitable for your particular circumstances and consult all available material, and, if necessary, seek professional advice.

Viridian Capital Advisors and its affiliates, as well as their respective partners, directors, shareholders, and employees, may have a position in the securities mentioned herein or may make purchases and/or sales from time to time. Viridian Capital Advisors, through broker-dealer services provided by Bradley Woods & Co. Ltd., (Member FINRA/SIPC), may act, or may have acted in the past, as a financial advisor to certain companies mentioned herein and may receive, or may have received, a remuneration for their services from those companies.

The above information whether in part or in its entirety neither constitutes an offer nor makes any recommendation to buy or sell any securities.

About Viridian Capital Advisors, LLC

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.

Marijuana remains illegal under federal law. The federal government does not recognize marijuana to have any medicinal value. Marijuana cultivation, possession, consumption, sales, and distribution are illegal under federal laws and also certain state laws. Investors in cannabis may be subject to law enforcement actions. Please note that there are differences in marijuana laws from one state, county, or city to another. Furthermore there are substantial risks associated with investing in cannabis companies, including, without limitation, changes in applicable laws, rules, and regulations, risks associated with the economic environment, the financing markets, and risks associated with a company’s ability to execute on its business plan.

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[email protected]

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