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It's hard to ship a newsletter when the deals keep getting wilder

We finished the last newsletter with the bombshell announcement of the acquisition of Caliva and Left Coast by Subversive Capital’s SPAC, and figured that would warrant a deep dive. But deals, it would seem, are very not dead, with another (bigger) SPAC, a game-changing mega reverse takeover (RTO), an even more mega merger of Canadian giants, and seemingly more action to come. Let’s break it down.

Subversive SPACtions: 
First off, before we forget Subversive in all the news, it’s still very worth talking about. The new company (the somewhat generally named “The Parent Company”) touts “a vertically integrated platform that includes cultivation, manufacturing, brands, retail and delivery” with the #1 net revenue in California, “the most powerful cannabis economy in the world”. The sell seems to be consolidation (with $575M in cash), a true vertically integrated backbone, real distribution advantage (88% of CA population by 2022), and, of course, the value-add of the Chief Visionary - Young Hov himself.

Caliva, at first glance, is an okay starting point to build off of, although Left Coast seems an odd addition - it’s a large extractor and a “house of brands”, but… none of the brands seem particularly notable outside a few celebrity affiliations. As for those celeb brands (and the forthcoming work from Jay Z), there’s still the continued question of whether celebrity brands... even work

It, of course, seems a little expensive (as it typically goes with SPACs) - at a valuation of $614M, it’s entering the market valued at ~18x next year’s EBITDA of $34M (they’re expecting to lose $25M this year). It also seems like it might be a heck of a deal for Jay Z/Roc Nation (assuming the 40% ownership by “Vendors” is primarily Jiggaman). It’s also a hard stock to own - trading on the NEO and over-the-counter, it’ll not be available to a lot of retail investors - likely part of the reason why the stock is still flat after the news.

It’s… interesting? The Parent Company’s success will likely depend on what they buy now with their big pile of cash. In that sense, it’s almost the same question they had before the acquisition, just now with a little more specificity and a lot more Jay-Z.

Adding onto the fun, cannatech advertising platform Weedmaps is going public by merging with another SPAC (Silver Spike Acquisition Corporation) at a $1.5B valuation. The company is, in cannabis terms, ancient - founded in 2008, it technically predates recreational cannabis legalization, or even medical in most. They’re also no stranger to controversy - suspicious reviews, listing unlicensed dispensaries, and even a federal subpoena.

Advertising within cannabis is, uh, hard, as traditional channels (Facebook, Google, lots of media) don’t want to serve cannabis businesses. Weedmaps has been a beneficiary, as companies have seen relatively strong performance in advertising on its core dispensary finder. They’ve capitalized on this by expanding into SaaS products for their customers, including logistics software, a wholesale marketplace (ala LeafLink, LeafTrade or Apex), a point-of-sale solution, and more. So far, it’s seemingly paid off, as they’ve been profitable since founding and grown revenue at 40% annually the last five years.  

There’s, of course, question marks. Depending on your perspective, you might think the deal is expensive at $1.5B (1.0x GMV, 9x revenue, 42x EBITDA). So far, the market seems to like it (and it doesn’t hurt to be NASDAQ-listed). But... what’s this look like when you’re eventually competing against the big guys, like Google, Amazon and Shopify? And what’s going on with that DOJ investigation?

Subversive and Caliva are betting on California as the heart of cannabis culture. Meanwhile, Illinois is doing its best to cement itself as the center of canna-business. Chicago-based Verano Holdings is joining Illinois competitors Green Thumb Industries and Cresco Labs in the public markets via a reverse-takeover at a $2.9B valuation.

This is, succinctly, a pretty big win for Verano, representing a roughly 3x step-up in valuation from the $850M acquisition by Harvest Health they walked from earlier this year. They’re a market leader within Illinois and, following their AltMed acquisition, will be operating over 40 dispensaries across 14 states. So next time you’re facing a tough breakup, just remember… keep on keeping on and there might be your Mr. Perfect (Canadian shell company) waiting for you around the corner.

A Match Made In Canada:
Speaking of northern courtship, Canadian players Aphria and Tilray have announced plans to merge, totalling nearly $4B+ enterprise value. The combined company will operate under the Tilray name, and boast operations in Canada, Europe and the United States (hemp and the recently acquired SweetWater Brewing). It all makes sense, but does bigger necessarily mean much better?

Together, the new company is the largest cannabis company by revenue… but that’s a little misleading. The combined entity does roughly $230M in adult use sales, with substantial other revenues from non-cannabis businesses in beer and hemp. Their presentation makes it clear that they aim to be a European leader - but it’s a tough market with unclear visibility on how it will develop - and that there’s eyes on an eventual (real) U.S. entry when possible.

What is clear - there will be substantial synergies in the businesses, with an estimated $78M in cost savings. Aphria is one of the few Canadian players to even approach executing well (hey, positive EBITDA!) - if they can use the newfound scale to win in Canada and build strength in Europe, there may be enough here to leave them positioned well for eventual US legalization. But it’s a big if, especially when U.S. cannabis players are gaining steam.

Deals. Aren’t. Dead:
As if that wasn’t enough, deals are (decidedly) not dead. Cannabis’ resilience through one of the most challenging years in recent times has seemingly assuaged investors’ previous concerns. Beyond what we’ve outlined:

If we’re placing cannabis on the hype cycle timeline, it’s really feeling like we might finally be clearing the “Trough of Disillusionment” and heading up the “Slope of Enlightenment”. Expect enthusiasm (and deals) to be significant - especially if regulatory sentiment stays positive (where we’ll dig in next week). In the meantime, hope your holidays are happy ones!

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