Expect More Cannabis Mergers After Leading American Operators Raise Nearly $1 Billion

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Friends,

2021 is off to a fantastic start for cannabis investors. We will be detailing the performance shortly, but the New Cannabis Ventures Global Cannabis Stock Index tacked on a 27.8% gain in January on top of the Q4 rise of nearly 62%. Since the end of September, the index has more than doubled.

Four weeks ago, we discussed why we expected the growth to continue, sharing 9 potential growth drivers, and some of these are already kicking in, especially on two fronts: improving access to capital and a heightened pace of M&A.

During January, seven of the largest American multi-state operators (MSOs) by market cap raised equity capital that we would consider for growth. The deals got done at relatively tight discounts to the market price, typically without warrants, and were supported by substantial institutional investor participation. Beyond the equity markets, Curaleaf priced a $50 million debt deal that suggests improving terms for borrowing.

The table below shows the amount of capital raised by each company:

Capital raising wasn’t limited to MSOs, as we saw several Canadian licensed producers (LPs) sell shares. These deals were less about growth capital than balance sheet repair for the most part, but some of the capital raises, like Village Farms, were for growth.

M&A has been taking place in both Canada and the U.S. We first shared our expectation that consolidation would be a big theme in mid-December, right before Ayr Strategies announced two single-state operator buys and Columbia Care announced the pending acquisition of private MSO Green Leaf Medical. Since then, Columbia Care announced another California acquisition, while Cresco Labs announced the pending acquisition of Florida operator Bluma Wellness. In Canada, Israeli operator IM Cannabis announced the pending acquisition of Trichome Financial, Heritage Cannabis bought a private LP, Valens announced it is acquiring a private LP, and Alcanna, as part of a spin-out of its retail cannabis operations, will be acquiring another retailer, YSS.

Another early theme has been very high trading volumes, especially for names that trade on higher exchanges. For the MSOs, we believe that the scaling up of AdvisorShares Pure US Cannabis ETF as well as increasing institutional demand has helped boost trading volumes, and these higher volumes have made it easier for companies to raise capital or insiders and early investors to sell stock without disrupting the price significantly.

Looking ahead, we expect that a lot of the M&A will likely be consolidation of private single-state operators or small MSOs, so it’s not clear that there are obvious public company acquisition targets in the U.S, but we think that we might see some consolidation in Canada that could include public company combinations. We believe that Curaleaf is a very likely consolidator, and we have shared that we expect it to make an acquisition in California

As we mentioned, seven of the largest MSOs have raised capital for growth, and the other three might do so as well. We note that after filing its initial S-1 to sell up to 10 million shares in August, GTI amended it on January 19th, perhaps a signal that it could be issuing equity. On Friday evening, Trulieve disclosed that it has filed a $750 million shelf registration. Harvest Health and Recreation also has an open shelf. Of course, smaller MSOs may raise equity capital as well. We continue to expect equity offerings in the U.S. to be well absorbed. This suggests that investors should be prepared to “buy the dip” on equity offerings, a strategy that can work due to the bull market that cannabis stocks are in now.

2021 began with a sharp spike in stocks in the first two weeks, triggered by the change of control of the Senate. While the back half of the month saw a modest pullback, the market looks very healthy from our vantage. With corporate coffers topped off after this recent round of capital raising, we expect the pace of M&A to accelerate in the months ahead.



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Sincerely,

Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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