A question asked of anyone building an enterprise is whether to finance it with debt, or equity. It’s the core tradeoff in corporate finance: because whichever the method chosen, it’s the primary component of the cost capital.

At some points in time, debt is cheaper than equity. Other times, the inverse holds

This can be contingent on timing of a raise: think when interest rates dropped during the financial crisis of 2008-09, and central banks ended up pushing yields into negative territory in an attempt to keep investment and capital flowing. It can also be contingent on ‘what’s hot’: think of the capital that became available during the run up to legalization here in Canada…..I think of the in-rush through 2018, where many were ‘investing’ in anything that even resembled a pot leaf (or made passing reference to one). In that environment, set up a stand on the side of the road and sell them shares like there’s no tomorrow. Who needs debt anyhow?

Whether in startup, or years into a relatively stable business, corporate leadership gets to make that decision each and every time they look for funding.

When needed, one assumes the executive looks at the existing state of capital markets, current appetite for specific investments/products, and checks with their friendly banker to compare options available. The choice between them all? It largely boils down to cost.

I say ‘largely’, because sometimes, there’s only one option available to a company.

This isn’t the case for Curaleaf ($CURA) – which has been on a real tear price-wise (along with much of the MSO sector). That tear has presumably made lending available as well, as the prospects of some form of federal cannabis legalization under ‘Blue’ control of Congress and the Executive have been seen to increase. $CURA’s operations have been trending positive for the past 3 quarters and acquisitions are in the process of coming online (here’s Blue’s latest Quarter in Pictures and our most recent Structure on $CURA).

$CURA’s as hot as a pistol right now, warmed from all sides by exuberance and expectation.

Their $300MM debt of last January came in at 13% – and this was before their shopping spree. Surely, they could have their choice of financing at this point, perhaps at rates comparable (or lower) than previous? Don’t matter.

An overnight offering from their shelf put out $275MM (16.5MM shares @ $16.70). Overnight. Such is the demand for their equity at the moment. Their timing was immaculate. Simply, when you’re seen to be a darling, well, to quote an old phrase: ‘what you are is what you are seen to be’.

Did ‘BoJo’ (Chairman Boris Johnson) break out his calculator and do the math? Of course, I have no doubt. And the decision tells me he sees equity as less expensive method for this round of financing than debt. Not much dilution incrementally (they’re north of 700MM shares fully diluted).

Yet just a few months ago, BoJo had options a’plenty (according to him).

So? It implies $CURA sees its’ own share price as ‘frothy’, and the best handle to grab. I have a cost of capital for $CURA right now at ~=25%.

For any other outfit (cet par), there’s not much to talk about. But with $CURA, 2/3 of their float is non-public. That means 2/3rds of that $275MM heads straight into the value of the multiples and supers, which, collapses in October of this year. To some, it may also explain why BoJo went to the printers rather than the bankers.

This is all pretty straightforward. And it isn’t a screed.

It’s to point out that incoming shareholders are – to some extent – subsidizing existing ones (the world works like that). Also, that the forward risk of return for them is incrementally higher, because despite all the glorious DCF predictions around…..it’s still simply air at this point. Hey – that’s what’s investing is about, right? Maybe.

It doesn’t matter. Darling $CURA had scheduled a call with me – I had enquired in early December about ‘PT MASS’ and ‘Verdure’……and the $52MM CEO ‘Big’ Joe Lusardi pulled out of $CURA selling those companies to himself. $CURA flaked. I’d first identified PT MASS as a curiosity back in August of 2019, and it remains that to me.

Perhaps when one’s a darling, minions don’t matter.

I don’t own $CURA because I don’t like their capital structure.

The leverage in this thing is already owned, and what exists for subordinates is an overhang north of $1.9B at current share price…… and forward cashflow projections that largely assume a smooth and even regulatory opening across states in the coming years.

Such is the ebullience around them at the moment: $CURA’s stock closed today $0.50 higher than the overnight raise(!).

If it all feels a little like 2018 again, in my eyes, its’ because there’s a real probability it is.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $CURA