Cannabis SPAC deals hit nadir after investors snub sector
23/09/2021 18:38
By Shariq Khan
Sept 23 (Reuters) - U.S. blank check firms eyeing cannabis
companies are struggling to find suitable targets and many are
merging into unrelated industries, as weak after market
performance of recent Special Purpose Acquisition Corps listings
dent confidence.
Hopes of legalization of recreational use of marijuana in
the United States saw public cannabis companies enjoy some of
their best gains ever after Democrats gained slim control of
both houses of Congress and promised federal reform.
The ensuing frenzy saw 18 cannabis-focused SPACs raising
around $3.3 billion by August, with more than half of the amount
invested through SPAC mergers. But with Democrats making little
progress on their promises, the euphoria has fizzled.
Bankers and investors said cannabis SPACs that have yet to
finalize deals could see negotiations run into trouble. HERBL, a
California-based distributor faced a cut to its valuation in
recent months during merger talks with BGP Acquisition Corp https://www.reuters.com/article/us-herbl-m-a-bgp-acquisition/california-weed-supplier-herbl-in-talks-to-go-public-via-spac-merger-sources-idUSKBN2FD1P4,
Reuters reported in August.
While a global SPAC boom that started last year has calmed
and such vehicles are struggling regardless of their target
industries, cannabis-focused blank checks have been hit
particularly hard.
All but one weed company listed in the United States through
SPACs since 2020 are trading below the $10 per share IPO price.
By comparison, 46.5% of SPACs overall are trading higher since
their mergers, according to SPAC data provider BoardroomAlpha.
"Share price is incredibly important - it's the optic that
investors look at - but it's not the end all, be all," said Joe
Caltabiano, founder of Choice Consolidation Corp CDXX_uu.NLB .
"Where it becomes a problem is if you ultimately do need
additional capital."
Caltabiano, who listed Choice Consolidation in Canada in
January, said a "multitude of reasons are making the capital
markets tougher today than they have been previously."
CANADA WOES
Foremost among their problems is the fact that cannabis
companies are still unable to list on major U.S. indices because
marijuana remains illegal at the federal level, forcing them to
list in Canada, where trading volumes are a fraction of the U.S.
level.
Shares of U.S.-based cannabis companies are down 11.4% this
year after surging 60% in February, based on the AdvisorShares
Pure U.S. Cannabis ETF. Meanwhile the MJ ETF, which tracks
global pot stocks, is up 5.5% this year.
SPAC sponsors across industries are struggling to raise cash
through equity sales https://www.reuters.com/business/finance/how-wall-streets-hottest-dealmaking-trend-fizzled-2021-09-16
in recent months due to a regulatory crackdown, adding to
cannabis trading woes.
Caltabiano said he is optimistic for a recovery in equity
markets but his SPAC is turning to debt financing.
A scarcity of large enough target companies to meet deal
size requirements is also forcing cannabis SPACs to buy into
unrelated sectors. Five of 18 such SPACs raised so far have
merged into industries unrelated to cannabis, according to
Viridian data.
Tuscan Holdings Corp II THCA.O , another cannabis-focused
SPAC, is now looking at merging with a company in the real
estate technology sector, two sources told Reuters.
Despite the challenges faced by SPACs and the public
markets, private venture capital has remained strong, forcing
SPACs to overpay when buying a private company, said Bill
Grownley, partner at the law firm Goodwin.
Mercer Park SPAC bought Glass House in April at a 28.8 times
the EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortization) multiple, compared to public peers trading at 15.7
times EBITDA on average, according to Viridian.
"The entire VC world is on fire and valuations are very high
across the board, whether its cannabis or not. If SPACs do not
perform, a ceiling on potential exits has to inevitably affect
the valuations in the private market," Grownley said.
"It's just a question of who blinks first."
(Reporting by Shariq Khan in Bengaluru
Editing by Denny Thomas and Bill Berkrot)
((Shariq.Khan@thomsonreuters.com; Within U.S.+1 646 223 8780,
outside U.S. +91 80 6182 2681; Twitter: @shariqrtrs;))