February 2, 2022 (Investorideas.com Newswire) KEY INSIGHTS & TAKEAWAYS
Transactional Activity: There were two more transactions and a $50.7 million higher volume this week than the prior week. Compared to last year’s same week, four fewer transactions closed with a $307.5 million lower volume. The average deal size was $15.1 million this week vs. $39.8 million in the same week last year.
Capital raise activity continues to be muted, possibly reacting to the sharp declines in global stock markets. Total capital raises for the first four weeks of 2022 total just $249M, down 81% from last year’s total. Equity issues are down 88% in the U.S. and over 96% in Canada.
The Viridian Chart of the Week below shows that valuation multiples are close to their lowest point for the last 2 1/2 years. We have updated the chart to reflect the two days of market upswing following the announced reintroduction of the Safe Act. Multiples of the next twelve month EBITDA for the group of $1B + MSOs had dropped to as low as 8.2x before rallying to their current 9.0x. We are still skeptical that banking reform will pass. Still, we note that a significant M&A transaction, Verano/Goodness Growth, is another bolster for the market, signaling a new leg to the consolidation trend.
Debt capital raises (shown by the light green bars in the graph below) staged a small rally based on the $75M raise by Trulieve.
Cap Raises by Sector: Companies raising capital this week came from a diverse list of sectors.
Cannabis stocks were down sharply for the 4th week of the year, with the AdvisorShares Pure U.S. Cannabis ETF off 6.7% after a record decline of 12.0% in week 3. Despite a strong rally in the first two days of this week, the ETF remains 11.1% below its year-end level.
Four relatively small and predominantly private equity deals closed this week for total gross proceeds of $15.28M.
The biggest gainers and losers for the week included:
Largest Equity Raise: On January 26, 2022, Jushi Holdings Inc. (CSE: JUSH)(OTCQX; JUSHF), the 10th largest U.S. MSO with an $800M market cap, raised approximately $10M in a private placement of subordinated voting shares.
Graticule Asset Management Asia was the sole investor.
Proceeds will fund potential strategic acquisitions and general corporate purposes.
The issue was sold at a 5.4% premium to Jushi’s preannouncement price.
The transaction implies an enterprise value of $878M for Jushi, representing 8.2x 2022 consensus EBITDA estimates, a premium to the 7.0x median for the 11 U.S. Cultivation & Retail companies in the Viridian Value Tracker database with market caps above $500M.
Public Company Listings: Two of the six companies that raised capital this week were public. Both trade and in Canada on the CSE and in the U.S. on OTCQX.
Equity vs. Debt Cap Raises: Equity accounted for four of the six capital raises and 16.8% of the proceeds.
Debt accounted for 52% of trailing 4-week capital raises. Most of the debt issues that closed in the first three weeks were for lower credit quality companies (except for last week’s PharmaCann deal), but that trend was reversed this week with the $75M add-on for Trulieve.
There were two closed debt deals this week with total gross proceeds of $75.6M.
The Largest Debt Deal: On January 28, 2022, Trulieve Cannabis (CSE: TRUL)(OTCQX: TCNNF), the third-largest U.S. MSO by market cap, completed an add-on issuance of $75M to its 8% Senior Secured Notes due October 6, 2026, bringing the total outstanding under the Notes to $425M.
The notes are guaranteed by all Restricted Subsidiaries (subs with more than 5% of consolidated EBITDA) and are secured by substantially all company assets.
The Viridian Credit Tracker ranks Trulieve as the 2nd best credit of the 11 companies with market caps over $500M.
A German Cannabis Transaction: On January 28, AMP Alternative Medical Products, a German subsidiary of Canadian Green rise Global (CSE: XCX), raised US0.56M in a drawdown loan facility.
AMP distributes medical cannabis and CBD products to pharmacies across Germany.
The loan matures on December 31, 2022, and carries a 5% interest rate.
MERGERS & ACQUISITIONS
Transactional Activity: Three M&A transactions closed this week with a total transaction value of $30.02M compared to six deals for $137.71M in the prior year. All of this week’s deals were completed by public buyers.
M&A activity is down about 14% from 2021 with $506M in transactions, which includes three significant transactions: the week three $211M Curaleaf purchase of Bloom, and week one acquisitions of MjBiz by Emerald X ($120M) and True Harvest by Greenrose Acquisition ($92M). We have been expecting an uptick in activity and today’s announcement of a $413M Verano/Goodness Growth transaction bolsters our faith.
The valuation gap we have discussed between the largest companies and everyone else will continue to be a significant driver of M&A activity. Cultivation & Retail companies with over $750M in projected 2022 revenues are now trading at a median of 6.79x 2022 consensus EBITDA ( down from 6.89x last week). In contrast, companies with less than $300M projected 2022 revenues are trading at a median of 3.44x 2022 EBITDA (down from 3.61x last week). Over the last week, this spread has narrowed by approximately 8bp to 335bp.
Most interesting announced M&A Deal of the week: On January 31, Verano Holdings (CSE: VRNO)(OTCQX: VRNOF) and Goodness Growth Holdings, Inc. (CSE: GDNS)(OTCQX: GDNSF) announced a definitive agreement whereby Verano will acquire all outstanding shares of Goodness.
The all-stock transaction values Goodness shares at US$413M on a fully diluted basis.
The acquisition implies a high valuation for Goodness Growth, based on 2022 and 2023 Consensus EBITDA estimates.
Verano is paying 21.07x Goodness Growth’s estimated 2022 EBITDA and 11.25X estimated 2023 EBITDA.
The implied Goodness Growth share price of $2.39, based on the exchange ratio and Verano’s closing price on 1/31/22, is a 46% premium to GDNS closing price on 1/31/22.
The deal is 36% dilutive to Verano on a proforma 2022 EBITDA per share basis.
In conjunction with the transaction, GDNS executed an amendment to its credit facility with Chicago Atlantic, allowing access to an additional $55 million of “Delayed Draw Term Loan” for working capital, general corporate purposes, and expansion of New York operations. Verano has agreed to reimburse GDNS for all interest expenses above 10% until the earlier of the closing of the transaction or the termination of the transaction. The facility is relatively expensive, carrying a minimum cash interest rate of 13.375% and additional PIK interest of 2.75%. The facility matures on April 30, 2023, and its refinancing represents an opportunity to improve the cash flow of GDNS. The Viridian Credit Tracker ranks Verano as the 3rd strongest major MSO from a credit perspective. We would expect the company to be able to refinance in the below 9% range post conclusion of the merger.
Implications for the cannabis capital markets
In previous publications, we listed two potential catalysts that could make for a turnaround in cannabis stock prices: 1) significant new M&A activity and 2) a renewed attempt at banking reform. Both of these planks are now in place, and Tuesday stock prices show continued enthusiasm after a strong performance on Monday.
We have consistently pointed out that a significant driver of recent M&A activity is the gap between acquirer and target valuation multiples. This transaction is the opposite: Verano is trading at only about 6.6x 2022 EBITDA, whereas the purchase price for GDNS implies a 21x multiple. Verano is looking at the long-term strategic benefit of acquiring a portfolio of licensed and partially built-out assets that it can finish improving its strategic and long-term financial position. The New York license alone may be worth $200+ million, and the opportunity to expand in this market justifies the premium valuation paid.
We continue to foresee an uptick in strategic public/public M&A transactions and believe that the odds of more significant transactions are increasing. Other potential acquisition targets include Planet 13 and 4Front, and we would not be surprised if larger undervalued Tier 1 or 2 MSOs begin to entertain strategic combinations. Several of the top management groups of these companies come from investment banking backgrounds, and the financial and operating gains to scale are not lost on them.
The last time cannabis stock prices fell off the cliff, it brought M&A activity to a virtual standstill. We have not seen this happen in the current market downturn, and we do not expect it to happen for reasons shown by this transaction. The common wisdom is that since the stock is the primary acquisition currency, acquisitions should be less attractive when stock prices fall. The fallacy of this argument is two-fold: 1) We continue to see most acquisitions benefiting from the valuation gap between large and small companies, and 2) perhaps more importantly, the common wisdom is only looking at the transaction from the buyer’s perspective. From the seller’s point of view, the situation may be quite different. Like many large MSOs, Verano stock was hammered in the latter half of 2021 and early 2022, and at 6.6x next year’s EBITDA represents an extraordinarily attractive investment. We believe that sellers are increasingly looking at the long-term investment potential of the acquirer/s stock and prefer receiving discounted stock rather than cash. GDNS may well be looking at Verano stock as the gift that keeps on giving.
Public vs. Private: All three of this week’s 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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