Thursday, the analyst Pablo Zuanic of Cantor Fitzgerald provided an industry update on four recent M&A transactions and Glasshouse Series B Preferred Share Issuance.
- Zuanic said the agreement between Curaleaf Holdings Inc. CRBLF and Four20 Pharma stands out from the rest as it could have the greatest long-term strategic implications” especially if Curaleaf International opts for a NASDAQ listing (in the event that US MSOs do not have the ability to self-list) .”
- Re SNDL SNDL buy Valens VLNS, Zuanic said the deal helps the company grow its Canadian recreational moat, more than double its recreational share and significantly expand its merchandising business. “The challenge will be to make Valens profitable,” he said.
- Likewise, he congratulated Aurora Cannabis ACB buying 50.1% of Bevo Farms (a propagator) and called the deal “the best way for the company to create value for the closure of Sky’s facility”.
- Re TerrAscend TRSSF expanding its business footprint in Michigan, Zuanic noted that the move “goes against the grain for an MSO, (…) in what is a growing but challenging market.” Likewise, he noted that the company’s retail network in Michigan “outperforms in terms of revenue per store.”
- Beyond mergers and acquisitions, Zuanic reviewed Glasshouse Series B Preferred Share Issuance (25% dividends in year 4 plus warrants with strike price 2x above market price) vs. Pharmacielo debentures (11% coupon; warrants with strike price 3.4x current market price).
SNDL expands its presence in the leisure market
SNDL continues to expand its Canadian moat by buy Valens. On 8/22/22, Sundial Growers, also known as SNDL, announced that it would acquire The Valens Company in an all-stock transaction (0.3334 SDNL shares will be issued for each Valens share at closing), which at the time of the announcement was worth C$138 million (SNDL already owned 6.2 million shares of VLNS for a 7.8% stake), for a 10% premium to the VWAP of 30 days.
Closing is scheduled for January 23.
Aurora sees strategic value in the spread
Aurora enters the spread segment and keeps half of Sky, for a different use now. In mid-May, Aurora announced that it would be closing its flagship Sky facility in Edmonton (one of the largest greenhouse cannabis cultivation sites in the world), as part of its cost-cutting efforts.
Although Sky’s assets are divested (which could be recovered), ACB will retain 50.1% of Sky. “As the best value creation option for Sky, according to management, ACB will pay C$42 million (after allowances) in cash for a 50.1% stake in Bevo Farms (one of the largest providers of vegetables and ornamentals propagated in North America), plus up to $12 million in earnings over time,” Zuanic said.
Bevo will buy Sky from ACB for C$25 million payable in royalties once Sky becomes operational again.
As the cannabis industry evolves, ACB management sees an attractive economy in spread and horizontal integration, due to the limited supply and high demand from the overcrowded cultivation segment.
“Bevo operates 63 acres of greenhouses in British Columbia, supplies greenhouses, nurseries, field farms and wholesalers, and generated $9 million in EBITDA in the last 12 months to 6/30 /22 ($39 million in revenue); on the other hand, ACB generated -$49 million in EBITDA in the March quarter,” Zuanic said.
TerrAscend doubles over Michigan
On August 24, TerrAscend closed the Acquisition of Kisa Enterprises for $28.5 milliona retailer with six Michigan licenses and five operational stores.
“With this agreement, TerrAscend now has 17 stores in Michigan (3% of hobby store licenses) and 32 nationwide,” Zuanic said. “The Pinnacle stores will be renamed to Gage or Cookies banners. »
Curaleaf expects to see more colors in the German recreational market
“A NASDAQ listing of Curaleaf International could create significant value. Initially, we thought that if Curaleaf International (68.5% owned by the US multi-state operator Curaleaf) was listed on NASDAQ, the value creation could be significant. But we would assume that the company would prefer to wait until investors had better visibility on German rec.[reational] legalization first. Since Curaleaf International operates in markets where contact with plants is legal (for medical purposes now), the company could be listed on NASDAQ, unlike its parent company MSO,” Zuanic added.
On Glasshouse Series B Preferred Shares
Tight GLASSone of the largest vertically integrated cannabis companies in the United States, is issuance of Series B Preferred Shares with a face value of $50 million.
“Earlier this week, it closed the first tranche for a combined $37.3 million, of which $22.6 million will go to paying holders of Series A Preferred Shares at face value (actually , these will receive warrants with an exercise price of $5 versus $10 before under Series A),” Zuanic said. “The Series B Preferred Shares will pay annual dividends of 20% (for years 1 and 2) increasing to 25% in year 4 and thereafter; the notes also carry warrants, each $1,000 unit comprising 200 warrants with an exercise price of $5.
Meanwhile, Zuanic noted that Pharmacielo PCLOF raised $15 million in debentures this month with a coupon of “only” 11% and offering warrants at 3.4x the current price.”
“Each $1,000 note carries an 11% coupon and 250 warrants with an exercise price of C$1.44 against a current stock price of C$0.42). exercise of the Glasshouse warrants is 2x above the current share price and preferred stocks pay an average dividend in the mid-20s, while Pharmacielo notes pay 11% and the strike price is 3.4 times higher,” Zuanic concluded.
Image by Ilona Szentivanyi.