Special Purpose Acquisition Vehicles (SPACs) struggle to find suitable purchases as valuations drop

By Dane Hamilton

The liquidation of cannabis stocks over the past year, which has caused investment to explode, also threatens to upend the plans of the Special Purpose Cannabis Acquisition Companies (SPACs) that were formed last year to purchase cannabis. cannabis assets when values ​​were high, according to industry experts.

More than a dozen PSPCs have collectively raised more than $ 3 billion from June 2019 to today with mandates to buy cannabis and cannabis-related companies, according to cannabis investment bank ELLO Capital. Companies typically have 18-24 months to buy from private companies or return money to investors.

But with valuations across the industry continuing to plummet from early 2019 highs, these PSPCs are scrambling to find viable acquisition candidates who match their revenue and valuation mandates, increasing pressure on these managers and their investors, the advisers said.

“They are starting to run up against their termination dates and they will start to be desperate,” said Hershel Gerson, CEO of ELLO, who advises on cannabis mergers and acquisitions, capital increases and other transactions.

The North American cannabis industry, once considered to have virtually unlimited potential for growth, has fallen to earth over the past 18 months due to a variety of factors, including national and state regulatory restrictions, inexperienced operators, and a lack of solid foundations of institutional investors who support companies over the long term. MJ Alternative Harvest, a proxy for the industry, fell more than 75% from the start of 2019 to March 2020, despite having bounced slightly These last months.

Much of the current crop of active SAVS was formed between early and mid-2019, when valuations were much higher, including Subversive Capital, which raised $ 575 million in June 2019; Mercer Park Brand, which raised $ 402 million in May 2019 and Tuscan Holdings, which raised $ 200 million in March 2019, according to ELLO data.

The surge in valuations in late 2018 and early 2019, a period when Canada legalized the recreational use of cannabis, along with a number of US states, prompted many cannabis companies to list their cannabis companies. stocks on the Canadian and US stock exchanges, often through reverse mergers with shell companies, leaving them off the table for PSPC transactions.

And now, with the industry still struggling to grow, fewer companies are available for PSPC transactions in last year’s assessments, leaving many PSPCs struggling to find candidates for the acquisition with substantial revenue and profitability indicators.

“You’ve seen a lot of PSPCs coming in at the same time looking for assets,” said Tahira Rehmatullah, president of T3 Ventures and Akerna board member, formerly MJ Freeway, which went public thanks to a merger with MTech, a SPAC, in 2019. “But valuations have gone down and the pool of acquisitions is much smaller than it was a year ago.”

SAVS may seek to bring together several companies

As part of fund mandates, SPACs must devote 80% of their capital to a single company, and they typically look for companies with positive cash flow and EBITDA. But with the difficulties of the industry, fewer private companies meet these criteria. Now, some PSPCs are looking to merge multiple companies to make the numbers work, presenting a litany of issues regarding individual company valuations, their share structures in the merged company, and management control, ELLO’s Gerson said.

“It’s hard to get them to agree, and if they agree, they worry about the relative valuations of their companies, which is a real challenge,” Gerson said.

There have only been a handful of SPAC cannabis deals in recent years, the most recent being Clever Leaves pending merger with SPAC Schultz Asset Management last month, and the 2018 merger of Cannabis. Strategies Acquisition of five US and Canadian companies with expected combined 2019 sales of up to C $ 270 million. Gerson said he expects several more PSPC deals before the end of the year.

Some prominent companies that could be viable PSPC candidates include Verano Holdings, which ended an $ 850 million deal this year to be acquired by Harvest Health this year; Canndescent, Ascent Wellness, Gage Cannabis, Connected Cannabis and NorCal Cannabis, industry watchers said.

But some industry players say the amount of money raised for cannabis PSPCs exceeds the number of viable applicants, forcing them to look to other parts of the industry for potential acquisitions.

Bruce Linton, the former CEO and co-founder of industry leader Canopy Growth, raised $ 150 million this year for a SPAC called Collective Growth, but the vehicle focuses solely on hemp, a plant derivative of legal cannabis in the United States and Canada, and related sectors.

The lack of pure and potential cannabis companies is “one of the reasons collective growth is not in cannabis,” Linton told Mergermarket. “How many awesome private cannabis companies are there?” ”

“There is a mismatch” between the amount of capital of PSPCs seeking deals and the number of viable acquisition candidates, he said, adding that he had reviewed more than 100 companies since the creation of PSPC this year, an indication of the extent of PSPC’s work. operators must search for suitable assets. “So many companies have gone public in recent years that it really limits the scope,” he added.

Still, industry watchers have said the challenges of raising capital from investors are likely to prompt a number of companies to seek PSPC deals, a move that can bring immediate capital, a list investors, institutional investors and managers qualified to guide companies, all key elements PSPC points of sale.

PSPCs are growing in popularity

PSPC deals, once seen as an alternative for companies that could not be publicly traded for various reasons, are experiencing a renaissance this year. Leading investor Bill Ackman in July launched Pershing Square Tontine Holdings, a $ 4 billion SPAC billed as the the biggest to date. And healthcare provider MultiPlan, a Hellman & Friedman holding company, agreed in July to a $ 3.7 billion investment from Churchill Capital SPAC for Go in public on the NYSE. As of July 22, 47 PSPCs across all sectors had held IPOs in 2020, compared to 59 for all of 2019 and 46 in 2018, according to law firm Debevoise & Plimpton.

“Anyone who has money is approached by those who don’t,” said David Traylor, senior managing director of Golden Eagle Partners, an investment bank focused on cannabis and life science companies. “Yet some PSPCs want companies with at least $ 150 million in revenue that they can grow to $ 300 million (in transaction size) with leverage. There are very few companies that have this kind of income.

Dane Hamilton is the U.S. healthcare editor for Acuris, a subscription-based news and data provider for finance and M&A executives.


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