First, there has been an overall “precipitous decline in hemp and cannabis M&A,” as recently stated by Scott Greiper, president of Viridian Capital Partners (“VCA”).[1] According to VCA, there were 94 hemp and cannabis M&A deals in the first quarter of 2019, and there were 19 such deals in the first quarter of 2020, representing approximately 80% fewer deals on a quarter-by-quarter comparison.[2] At the micro level, there were 25 M&A deals in March 2019 as tracked by VCA, and there were 5 such deals by March 2020, yet another 80% decline in deal count.[3] These numbers roughly match those released by Mergermarket, a leading provider of business intelligence and research. According to Mergermarket, there were 110 M&A transactions in the first half of 2019 compared to a paltry 27 such deals announced by the end of March, which represents approximately 75% fewer transactions.[4] The overall decline has affected total cannabis M&A deal value, which has spiraled downward from $9.2 billion in 2019 to just $325 million by the end of March 2020. The Exchange Traded Managers Group, LLC and ETF Managers Group, LLC (together, “ETFMG”) Alternative harvest exchange-traded fund (“ETF”) (NYSE:MJ), an ETF tracking the performance of certain cannabis-related investments, reports a 40% decline year-to-date. However, it should be noted that there are some small pockets of M&A activity. For example, Emerald Organic Products, Inc. (OTC:EMOR), a health sciences company, announced on March 27, 2020 that it signed a Plan of Merger Agreement with Bonsa Health, a digital pharmacy entity capable of same day delivery of prescription medications anywhere in the United States, for a 51% controlling stake in the latter.The brief optimism surrounding the Bonsa Health merger is overshadowed by the grim overall negative trend in cannabis deal count. VCA, which shares the results of M&A deal tracking through a proprietary tool on its website at the end of every week, had the following figures for the last three weeks, namely the weeks ending June 12, June 19, and June 26, 2020, as seen below:
- Week ending June 12, 2020: This week was the most active week to-date for cannabis M&A in 2020, with 3 M&A transactions compared to 9 in the prior year period. The largest M&A transaction for the week was Charlotte’s Web Holdings, Inc. (TSX:CWEB) closing the acquisition of all the issued and outstanding subordinate shares of Abacus Health Products Inc., the total consideration being $76.7 million of Charlotte’s Web common shares. Due to this transaction, Charlotte Web’s portfolio in the Topical Products category has enlarged. It should be noted that all 3 M&A acquisitions for the week were on behalf of public companies, which has been the reality in 90% of cannabis M&A transactions announced this year. It appears that public companies, owing to their fund raising ability, have become dominant purchasers (especially of private companies) in the cannabis space. Of the 3 acquired entities, 2 were private, and 1 was public. The 3 buyers came from 3 different sectors, specifically Hemp, Investments & M/A, and Cultivation & Retail.
- Week ending June 19, 2020: This week saw 2 M&A deals compared to 8 for the same period in the prior year. M&A remains significantly below the levels seen in the first and second quarters of 2019, but there appears to be a slight uptick in weekly activity. A healthy guess would be that this is driven by a multiweek increase in capital raising and stock price performance of public cannabis companies, also the most dominant acquirers in the space. The largest M&A transaction was IGNITE International Brands, Ltd. (“IGNITE”), a global consumer packaged goods and lifestyle brand, announcing the closing of the remaining issued and outstanding equity securities (a 90% acquisition) of Ignite Distribution, Inc. As a term of the transaction, IGNITE issued an unsecured promissory note for $3.35 million, with an annual interest rate of 10% and maturing on June 11, 2022. For both M&A deals, the acquisitions were by public companies, which account, to-date, for 90% of the M&A cannabis transactions in 2020. The 2 buyers came from two different sectors, specifically Cultivation & Retail, and Infused Products & Extracts.
- Week ending June 26, 2020: There were no M&A transactions, which is down from 7 in the prior year period. This week marks the third week in the preceding 5 weeks with no M&A activity. Due to constrained capital availability, many companies have canceled previously announced acquisitions to focus on cash production in their existing operations. These substantial amounts of capital could potentially be deployed in the second half of 2020, which is when increased M&A activity is to be expected.
- Week ended June 12, 2020: For the first time in 2020, there were more dollars raised, as well as a higher average tranche size, compared to the same weekly period of the prior year. There were 7 capital raise transactions totaling $73.8 million compared to 12 capital raise transactions total $71.8 million for the same period in 2019. Average tranche size appears to have increased, with $10.5 million for the week ended compared to $6 million for the period in the year prior. This week appears to have been an outlier active week for both aggregate dollars raised and number of transactions. The largest capital raise was for MediPharm Labs Corp. (TSX-LABS), a Canadian producer of pharmaceutical quality cannabis oil and concentrates, which raised $37.82 million (Canadian) in private placement of 2 series of unsecured convertible notes. Of the 7 capital raises, all were closed by public companies, which matches 2020 data. So far this year, public companies account for 82% of all capital raises compared to 66% for the same period in 2019. Public companies currently account for 91% of total dollars raised compared to 72% for the same period in 2019. It would appear that a recovery in cannabis stocks is fueling competition among public companies to seek both debt and equity financings. As between equity and debt capital, equity-based capital comprised 4 of the 7 transactions, and a convertible debt-based financing comprised the remaining 3.
- Week ended June 19, 2020: As expected, there was a downturn in activity. There were 3 recorded capital raise transactions totaling $59.6 million compared to 9 transactions totaling $158.8 million during the same weekly period in 2019. Perhaps in part due to the Charlotte’s Web M&A transaction for the week ending June 12, 2020, average tranche size for the week ending June 19, 2020 was $19.9 million compared to $17.6 million for the same weekly period in 2019. The largest capital raise was for Charlotte’s Web, which had previously closed its announced aggregate gross proceeds to the company of 77,625,000 (Canadian). Some 11,500,000 units of the company, at a price of $6.75 (Canadian) per unit, were sold pursuant to the offering, including the full exercise of the over-allotment option by the underwriters. Of the 3 capital raises, all were closed by public companies. As between equity and debt capital, equity-based capital raises comprised all three capital raise transactions, which is the first time in 2020 that no debt raising was reported as part of total capital raises.
- Week ended June 26, 2020: This week, there was a higher dollar volume but few aggregate number of transactions compared to the same weekly period in 2019. There were 5 recorded capital raise transactions totaling $32.5 million compared to 13 transactions totaling $235.4 million for the same weekly period in 2019. Average tranche size was $6.5 million this week compared to $18.1 million for the same weekly period in 2019. The largest capital raise involved Aurora Cannabis, Inc. and Alcanna Inc., who jointly announced a short-form prospectus offering for aggregate proceeds of $27.6 million (Canadian). Aurora sold 9.2 million shares at $3 (Canadian) per share, exiting its 23% stake in Alcanna, and also agreed to cancel 1.75 million Alcanna warrants with exercise prices of $15 (Canadian) for no consideration. Of the 5 capital raises, all were closed by public companies. As between equity and debt capital, equity-based capital raises comprised 4 of the 5 transactions, as well as 91% of the proceeds raised. It appears that debt financing has drastically declined as a percentage of total capital raised since the major multistate operators completed several large debt financings immediately prior to the COVID-19 pandemic.