By Scott Greiper, President of Viridian Capital Advisors.
Greiper will be speaking at the Virtual Benzinga Cannabis Capital Conference on June 1. Event starts at 10 a.m. ET.
A curious phenomenon occurred in the cannabis public capital markets over the past year. While stock prices fell, investment activity shrunk, IPO’s slowed and M&A transactions ground to a virtual halt, the amount of capital pouring into cannabis and hemp industry SPAC IPOs reached record levels.
Between March 2019 and May 2020, eleven cannabis and hemp focused SPAC IPOs raised more than $2.6 billion. This is more than all of the cannabis/hemp IPO activity in 2018 and 2019 combined.
Cannabis/Hemp SPAC IPOs Listed on U.S. and Canadian Exchanges
What is a SPAC?
A SPAC (aka “Special Purpose Acquisition Corp.”) is a blank check company formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. It is formed by sponsors with experience and reputations to allow them to identify and complete a business combination with one or more target businesses that will ultimately be a successful public company. Sponsors and management ideally are firms and/or individuals with demonstrated success in identifying, acquiring and operating growth businesses and with experience in the public company setting.
SPACs first began to appear in the early 1990s as the next iteration of “blind pools” that became popular in the oil and gas sector in the 1980s.
The SPAC structure offers opportunities for investors, management and target company sellers:
Investors: Allows investors to invest in a publicly traded acquisition platform backed by management teams that ideally have a track record of successful “roll-up” transactions. Provides liquidity in the form of the public stock.
Management: Provides an acquisition platform that enables management teams to be aggressive buyers due to the cash on hand from the IPO and the ability to use their public traded stock as current for an acquisition.
Target Company Sellers: Sellers know that a SPAC buyer is a well-funded buyer and that any stock portion of consideration paid for their business has the potential for current liquidity. There are also several clear challenges to the publicly traded SPAC platform as an acquirer:
Time Restrictions: Exchanges often require that an acquisition be completed within 24 months from the IPO, or shareholder capital must be returned. A SPAC may seek a time extension of up to 36 months.
Acquisition Size Requirements: The initial acquisition target must have an aggregate fair market value of at least 80% of the value of IPO proceeds. This can have the effect of narrowing the universe of target companies.
Target Company Restrictions: Until closing of the IPO, a SPAC is not allowed to have substantive discussions with an acquisition target.
What Does this Mean for the Cannabis and Hemp Sectors?
The amount of capital invested in cannabis and hemp SPAC IPOs in the last year, despite a broad decline in the industry’s capital markets, has significant and interesting implications:
Increased Industry M&A Activity: M&A activity in the cannabis and hemp markets came to a virtual halt in the last four quarters. According to the Viridian Cannabis Deal Tracker, the number of M&A transaction fell by more than 65% over this period. This decline was primarily due to the weakened state of public companies (that have been the most aggressive acquirers in the cannabis industry) due to shrinking stock prices and capital availability. With the more than $2.5 billion raised by SPACs, there is more buying power in the market to drive M&A activity.
M&A Activity Diversifies from Plant Touching to Ancillary Companies: Over the past three years, licensed cultivation and retail companies have represented more than one-third of all target acquisitions, according to the Viridian Cannabis Deal Tracker. This was primarily driven by the Multi-State Operator (“MSO”), which was building a portfolio of state licensed operations in different states. However, the cannabis SPACs that listed on the NYSE or NASDAQ cannot buy federal illegal businesses in the U.S., even if they are legal at the state level. As such, we’re likely to see acquisitions of non-licensed ancillary cannabis businesses and U.S. hemp businesses that are federally legal.
Increased Investment Interest in Distressed/Undervalued Cannabis/Hemp Businesses: The SPAC IPO investor is not investing in an operating business, but rather an acquisition platform. The fact that significant capital was drawn to the cannabis/hemp SPACs despite a protracted downturn in cannabis company stock prices and valuations, means that investors saw an opportunity to invest in distressed assets, or at the very least, attractive companies with reduced valuations.
Increased Institutional Investor Interest in the Cannabis and Hemp Sectors: The fact that the average industry SPAC over the past year raised more than $200 million in IPO proceeds, means that a significant portion of that demand came from institutional investors and large family offices. This is a positive sign for the industry as these types of investors have been largely on the sideline of investing in the cannabis and hemp sectors.
Private Companies Will Benefit: As public companies, SPACs primarily target acquisitions of private companies. With the narrowing of capital availability in the industry over the past year, this should provide much needed liquidity potential for private companies.
The rapid rise of the publicly traded SPAC in the cannabis/hemp industry portends well for investors, SPAC managers and target company acquisitions, particularly larger private companies. We’re likely to see an increased pace of acquisition activity in the industry as the SPAC buyer has to move to comply with the time requirements for successfully completing its initial acquisition.
Noticias sobre cannabis en Español en El Planteo.
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