The Bengal Bite 🐯 | Canna'nomics' | January 15, 2021
Cannabis operators in the United States are rushing to take advantage of the currently favorable canna'nomic' environment. A unified Democratic government, albeit with thin control of the Senate, led to investor optimism, which in turn led to larger U.S. cannabis companies utilizing the resulting momentum to raise significant amounts of capital. Potentially tellingly, many of the raises are equity at a slight discount to market prices - far from the terms investors were demanding months ago. Investors wary of such large capital raises dampening stock prices, as notably happened with some large Canadian LPs, may be comforted by the fact that U.S. firms’ financial trajectories are distinctly different from their Canadian cousins - solid growth, with more players expected to inflect into positive cashflow from operations this year. Taken together, the financial and political developments foreshadow a year ahead that will be anything but dull.
This week's Bite:
New additions to Bengal: We are excited to welcome former CEO and current Chairman of 4Front, Josh Rosen, as a Managing Partner, and Jerry Derevyanny as a Principal of the Bengal Capital team.
You get a bought deal, and you get a bought deal, everyone gets a bought deal! Cannabis operators (some of which are listed below) headed to the markets to raise capital via equity in light of elevated stock prices and favorable economic tailwinds. (Bloomberg)
Curaleaf -- $249m equity raise, $50m revolving loan.
Trulieve -- $750m shelf registration.
Ayr -- $108m equity raise.
Columbia Care -- $103m equity raise.
Planet13 -- $39m equity raise.
TerrAscend -- $177m equity raise.
Crystal ball gazing: From acceleration of M&A and funding in the capital markets to continuing momentum toward legalization on the state level, here are predictions for what to expect in 2021. (Cheddar)
Mo' money, less problems? A new cannabis ETF and strong fundamentals for American operators lead some to believe that recently announced equity raises are different than ones in the past. (New Cannabis Ventures)
Hot mess to hot stuff: 2020 was a breakout year for cannabis and some analysts believe 2021 will keep the trend going. (Needham)
Read more below:
Bengal Capital Welcomes 4Front Ventures Josh Rosen
In what is undoubtedly the most important news story of the week (:P), Bengal Capital is excited to welcome current Chairman and former CEO of 4Front Ventures Josh Rosen, along with Jerry Derevyanny, former General Counsel of 4Front, to the team.
Positive U.S. pot news spurs rush to raise cash
“When the results of Georgia’s Senate race were turning in favor of Democrats and New York Governor Andrew Cuomo proposed to legalize marijuana in his state, Curaleaf Holdings Inc. executives suddenly realized the company could benefit from some extra cash… in less than 24 hours, the company had raised more than $200 million by offering more stock on the Canadian Securities Exchange. ‘It was very unexpected in Georgia. That’s why we pulled the trigger as fast as we did, to prepare for what we think will be a very dynamic 2021,’ said Chairman Boris Jordan.”
2021 cannabis industry outlook: M&A, capital thaw and global opportunity
Heading into 2021 the cannabis market is expected to heat up. From strategic acquisitions to accretive mergers, cannabis companies will continue to expand capacity in newly-legal states and solidify positions in states that are on the precipice of legalization. Viridian Capital, a cannabis data analytics and strategic advisory firm, estimates that the industry has a backlog of about $2 billion dollars in undisclosed deals in the new year. Cannabis companies will also have more dry powder to sate their appetite given increased investor confidence in the space due to the incoming unified Democratic government.
Why cannabis investors should not fear this round of capital raising
Large capital raises should not worry investors, suggests Alan Brochstein of New Cannabis Ventures. The situation is different from post Canadian LP raises where companies were still building infrastructure and sales were nascent. U.S. companies have matured rapidly and are now showing significant sales and profit growth. Also, institutional interest is beginning to be felt, although liquidity is still a concern. Alex acutely remarks: “one of the challenges for [institutional investors] is actually finding enough stock. This was the reason the unnamed institution bought shares in a private transaction with GTI holders (twice). These offerings this week were priced at relatively narrow discounts on a bought-deal basis most likely because the underwriters are well aware of the demand. Beyond institutions, there is another aggressive large buyer in the market, the AdvisorShares Pure U.S. Cannabis ETF (NYSE ARCA: MSOS), which has been growing exponentially… In early December we described this ETF as a game-changer for the MSOs. At the time, the ETF had assets of $163 million. Over the past five weeks, it has soared to over $400 million… [driven by] primarily growth in the number of shares, which grew 61% in the past week alone.”
From hot mess to hot stuff in ’20; Industry outlook into ’21 looks smoother
Needham analyst Matt McGinley outlines the industry wins in 2020 and what to expect for 2021 -- “Strong industry growth and progress on regulatory reform drove significant equity appreciation among larger cap cannabis equities in '20. Into '21, we expect the market to be more discerning of geographic exposure, capacity to fund expansion, execution, and the ability to drive profitable growth… With state-level drivers of revenue looking similar in '21 to '20, we expect higher levels of M&A and more new public issuance, and think that infrastructure build-out will be the primary use of capital.” McGinley expects that existing markets rather than new are where most of the raised capital will be deployed, with capital market access opening the door to consolidation in markets like Canada and California and more bolt-on M&As to gain scale and allow for cross-state moves by existing MSOs.