TerrAscend buys Gage; AYR’s capital structure gets a paint job
Share This Post
TheCannalysts have been anticipating M&A activity in MSO-land for some time, and it’s not exactly high-art to predict it either. Despite the enthusiasm of the #MSOGang, there’s a number of middling shops with relatively weakening growth prospects out there.
We also expect sell-side to present M&A activity as a new ‘feature’ in sales pamphlets. Natch.
Hey, M&A is a catalyst within any sector after all….and can be driven by many reasons. ‘Consolidation’ is typically the driver. It’s a tool for companies to unlock ‘synergies’, expand into an economy of scale, create barriers to entry, erect moats….unifying separate asset bases can provide leadership many new knobs and dials and levers to turn and pull on.
We looked at Gage Growth ($GAGE) Q1 F2021 back in late June, and saw depth in related party deals and non-controlling interests (NCI), a crappy MD&A, and a company in full ramp. Their latest quarter saw sales increase by 50% (primarily due to of having stores online for a full reporting period and incremental openings), implying an average annual run rate of some $14-16MM/store. This is an incredibly rough estimate though – comparatives and ‘normal’ G&A run rates are in flux at this point of company maturity.
Terrascend ($TER) obviously saw something they liked, and $GAGE was happy to sell to to them for a reported $545MM (and at an 18% premium to $GAGE’s current share price). A pricy $30MM termination fee is attached, yet the deal looks pretty far downrange. This thing’s been probably under discussion for months.
And…..it is complex.
Super and exchangeable shares have provisions installed around specific individuals. And although there’s no mention of Spartan anywhere in the press release, those exchangeable shares are likely the primary driver around the mechanics of conversion. It looks like the optionality is being rolled right into $TER, I’d expect overhang there to blow out with this deal coming onto their balance sheet. And it was top heavy before this.
$TER flushed their CEO back in March, and our last structure on them mused that $STZ might have had a hand in it. This move is a regional play, and feels like $WEED’s early days of expansion. Maybe $STZ wanted the guy in charge of $TER (Jason Wild), to be the guy to go shopping. If there is a signal of $STZ to myself, it’s that growth of optionality in the capital structure (paid for by the common shareholder) seems an aside to the deal. Which, does align with $STZ’s history.
$TER touts entry into the ‘3rd’ largest market in the US, expanded cultivation, and on-boarding of ‘premium’ brands like ‘Cookies’ (Khalifa Kush is in there too). At this point, all I can say is $GAGE hit a payday, and monetized themselves quickly. I suspect that was by design. There will be hot takes of varying quality around this ($TER moved now when prices were down!), and unlike Trulieve’s ($TRUL’s) pickup of Harvest Health ($HARV), integration of an SSO will have far fewer seams.
(Interestingly, ‘Spartan’ – an NCI of which $GAGE only holds 49% of, while it holds a whack of $GAGE’s assets – is the one who owns the licensing agreement with Cookies).
I’m looking forward to the post acquisition statements of both $TER’s and $TRUL. I expect both of them will show large increases of leverage in their capital structures. $TRUL showed prudence by including conditions that $HARV tidy up the place before taking the keys from them. I don’t see this (yet) in $TER’s buy of $GAGE.
Bruce Linton has yet again succeeded in taking a bag of cash out of cannabis.
AYR Wellness ($AYR.A) has made 2 announcements lately related to their capital structure: a share buyback; and an acceleration of existing warrants.
TheCannalysts have a whack of research on this outfit. And we note their recent marketing changes (‘pivot might be too strong a word here) to promotion of ‘quality’ in products, almost with a religious fervor. GoBlue’s look at their latest quarter is fulsome, and a quick review of their latest conference call reveals reiteration of their guidance for next year. A listener might sense some frustration from CEO Jon Sandelman around the lack of love he’s been getting from the markets. I did.
The warrant acceleration is analogous to a buyback in a couple of respects – in that this one proposes a cash settle mechanism, and also drops a $0.75 premium to induce folks to turn in the warrants. They are $20+ CAD in the money right now. Presumably, Sandelman could have gotten on the phone, and asked holders politely to strike them. Perhaps he was rebuffed.
$AYR.A began the year with some 7.4MM of them outstanding, 900k have been cashed in over the past 2 quarters.
So. Why would a CEO offer up cash to early investors – to compress an exercise period? Easy: the cost at this moment is less than the $152MM liability he’s packing in contingent consideration. We examined that liability in depth back in April, and I still have challenges backing into $AYR.A’s calculation. This is the only one I’ve had such issues with in the sector. The financial statements are complex, and reflect a ‘bankers’ approach to capital structure (for lack of a better word). Nevertheless…..
CEO Sandelman sees benefit in acceleration, and taking 6.5MM potential shares out of the float is worth the cost to shareholders. The napkin?
6.5MM warrants x $11.501 strike price = $93MM CAD coming in
Cash Induced (assumes all warrants tendered)
6.5MM warrants * $10.75 = 6.5MM * 10.75 = $87MM CAD coming in
Both paths will eliminate of a good chunk of the derivative liability, which I value the acceleration reducing by $125MM2 USD. The $0.75 carrot was probably a must for $AYR.A hitting the red button on them and starting a countdown clock.
I don’t know. Looks like somebody put a bug in Sandelman’s ear about the capital structure, and this and the share buyback are the result. The move is largely defensible, and Sandelman can (and probably will) claim high ground in tending to shareholders interests in the acceleration.
Where I see it a little cute is that Mercer Park’s ($BRND) warrants (~=1MM) and all founder’s warrants (~=2.9MM) are exempted from the acceleration. $BRND is a different company, and Sandelman runs that shop too. If there’s hair on this thing, that’s where it is. The founders would have probably told Sandelman to go climb his thumb.
Regarding that buyback, GoBlue is un-enamoured. Me? I see it more as bankers being bankers. I mean, if the entire 5% is brought in, it’ll be largely funded by the warrant strikes. Potato, po-tah-to. At least from a balance sheet perspective.
Looking through the lens of cash though, it’s a different animal. For a company with this spanse of operations……who’s G&A alone remains higher than gross margin, I see a fair bit of funding risk rising from this move. It’s all well and good to guide to $800MM next year, and promise a land of milk and surplus profit.
Reality can really fuck with that dream though, and chucking out $70MM of it to retire a relatively small part of your float at this stage of maturity……with regulatory flux in-sector…..well. It’s backloading risk to myself.
Despite historical claims of being ‘fully funded’ – $AYR’s acquisition rampage continues in PENN – with today’s announcement another $45MM cash commitment within a $120MM buy of 3 storefronts there. Hella. The $135MM of cash currently on $AYR’s balance sheet is going to get quite a haircut by the end of this year.
CEO Sandelman didn’t mention that 4MM RSU’s to management vested in the first 6 months of this year (also at some $15 in-the-money). Nor that another 3.6MM of them are bumming around the balance sheet, waiting patiently to come to life.
All in all, I’m neutral to the warrant acceleration. I see nothing that I like in the buyback. At all. If the core business was about paper and derivatives and notes and financing, I could see it. This business is not that: it’s growing weed, putting it into bags, and selling those bags. This buyback is a banker’s move, not an operator’s. And a red flag to myself.
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 any of the companies mentioned, excepting a small position in $TER.
1 – I see the warrants at $11.00, not $11.50 – because a note in the financials mentioned that $AYR.A laid in a $.50 reduction in the strike price in 2020, and booked it as ‘SBC’. I can’t back into their derivative liability as it is, and I’m not chasing $0.50 around this balance sheet. One has to know when to cut their losses 🙂
2 – I have to caveat the preceding as well – I have literally no clue the what or how $AYR.A is doing the calculation, and assume that I don’t have complete information.