Cannabis investment vehicles wait a long time

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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Merger control for funds and financial investors: varying risk profiles for VIE structures in China

In April 2020, and for the first time, the Chinese competition law authority (the State Administration for Market Regulation, or SAMR) accepted a merger control case involving a party incorporated under an “variable interest entity” (LIFE) structure.

While this case was not announced with fanfare by SAMR (indeed, it was only revealed through the standard public disclosure process applicable to all filings made under the simplified notification procedure), it is supposed to signify a significant change in the position of SAMR vis-à-vis the VIE structure.

For foreign investors who hold stakes in Chinese companies through VIE structures, or who seek to invest, this is an important development. In this e-newsletter, we explore what this means for funds and other foreign investors.

What is a VIE structure?

VIE structures and merger control in China

VIE structures now able (and expected?) To deposit

Increase in maximum penalties in consultation

What is a VIE structure?

VIE is a concept commonly used by foreign-invested companies operating in industries where China has restricted foreign ownership. The VIE structure can be used to circumvent certain restrictions via: (1) an offshore holding company creating a wholly owned subsidiary (under a wholly foreign-owned company, or WFOE structure) in China; and (2) the WFOE would control and then receive all of the profits of the RPC business through a series of contractual arrangements. The shareholders of the Chinese company would remain Chinese nationals (according to regulations), while the offshore holding company would recognize the income and record the operations of the WFOE in its financial statements.

The VIE structure allows domestic Chinese companies in narrow sectors to seek foreign venture capital funding, as well as register in offshore jurisdictions. Many tech giants listed on China’s stock exchanges have adopted this structure, including Alibaba, Baidu and Tudou.

VIE structures and merger control in China

Although VIE structures have been widely used for some time, until recently they were not formally recognized by the Chinese government. In particular, it is common practice for SAMR (and its predecessor, the Ministry of Commerce) not to formally accept merger review cases involving companies operating under a VIE structure.

This has led to significant uncertainty as to the risk of non-compliance for EDV structures. Despite widespread practice, there is no clear legal basis for SAMR not to accept deposits involving VIE structures, nor an explicit exemption under anti-monopoly law (AMLA) on which companies adopting such structures could rely not to notify triggering transactions.

However, this has now changed following the recent acceptance by SAMR of a filing involving a VIE structure. On April 20, 2020, SAMR officially accepted a dossier submitted by Huansheng Information Technology (Shanghai) Co., Ltd. (“Huansheng“) and Shanghai Mingcha Zhegang Management Consulting Co., Ltd. (“Mingcha“). Huansheng is said to be a subsidiary of Yum China, the operator of restaurant chains such as KFC, Pizza Hut and Taco Bell in China.

According to the public disclosure form of this file, Mingcha is controlled by a Caymanian company “via related entities on the basis of a series of contractual arrangements”, which shows that this company is incorporated via a VIE structure. According to recent reports, consideration of this transaction has been hampered due to competition law complaints raised by third parties, which appear to be unrelated to the fact that Mingcha is organized under a VIE structure.

VIE structures now able (and expected?) To deposit

Following this case, it is clear that SAMR will accept deposits regarding transactions involving VIE structures. More importantly, this likely means that SAMR will now expect such deposits, and the involvement of a VIE structure will no longer serve as a reason not to file.

In turn, SAMR may begin to sue VIEs for failing to file transactions. While we cannot rule out the possibility that SAMR will pursue historical transactions involving VIE structures that were not filed due to the previous policy position, attention should certainly be turned to future transactions. In particular, for funds and other investors in Chinese companies organized under a VIE structure, and who have previously ignored the need to make merger review filings in China due to SAMR’s approach, this may mean that a fundamental shift towards merger control strategy is needed in relation to future transactions. Going forward, it will be essential to consider Chinese merger control even when the transaction involves a VIE entity.

Increase in maximum penalties in consultation

In addition to SAMR’s change of approach to VIE structures, the potential risk of non-reporting is also likely to increase in the near future. Currently, the maximum fines that can be imposed by SAMR are capped at RMB 500,000. However, SAMR is currently consulting on various AML changes, including a substantial change to its fine powers.

According to the SAMR’s AML amendment proposals (published for public consultation in January 2020), it is proposed to significantly increase the maximum fines for failure to notify a transaction in violation of merger control rules, passing from RMB 500,000 to 10% of total enterprise revenue in the previous fiscal year.

This increased cap also applies to other breaches of merger control rules, including the completion of transactions notified before authorization (i.e. the jump of weapon) or the completion of a transaction prohibited by SAMR. The proposed increase in fine powers aligns the PRC regime with that of other key merger control jurisdictions, such as the EU. However, it should be noted that merger review requests are triggered more frequently under the PRC for a variety of reasons, including significantly lower turnover thresholds and the lack of “full functionality” criteria in the PRC. valuation of joint ventures that exist in the EU regime.

These changes are likely to put merger control compliance in the PRC even further into the spotlight, especially as jump-arms has long been an enforcement priority of SAMR (and its predecessor, MOFCOM). .

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