Dai Truong's Cannabis Newsletter - Issue #9


The biggest news from this past week was certainly Canopy’s acquisition of Acreage. The larger takeaway is how consolidation in the space is happening much quicker than anyone anticipated, but I guess securing a high floor / multi-billion dollar exit seems better than a go big or go home approach that Blue Chip tech startups employed when they had those options on the table.

Undoubtedly, people are already trying to figure out the next takeover target. Seaport Global Securities analyst Brett Hundley thinks iAnthus Capital Holdings Inc., which operates 21 dispensaries in 11 states might be a likely target (it has a similar profile to Acreage with management coming from high finance backgrounds). The company could be acquired for $8 a share or higher for a total takeout value of $1.5 billion, Hundley wrote. However, he also cautioned that the U.S. government could throw a wrench into the Canopy/Acreage deal because of Constellation’s 37% stake in Canopy and the country’s strict alcohol regulations. “Hypothetically, what is to stop an alcoholic beverages manufacturer like Constellation from co-locating product at retail dispensaries with cannabis products?” he asked. “We think that the U.S. government will look at this transaction from multiple angles.”

I imagine anyone who owns stocks in publicly-traded Cannabis retailers probably went out and loaded up on any large U.S.-based Cannabis retailers after the announcement.


Cannabis

Top execs at American weed retailer MedMen quit

MedMen’s COO and General Counsel have both resigned amid an employee shakeup at the marijuana retailer.

Bank of America Merrill Lynch launches marijuana sector coverage, predicts more cross-border deals

Bank of America Merrill Lynch deepened its interest in the cannabis industry by initiating coverage of the burgeoning sector, less than a year after it financed Constellation’s multibillion dollar investment in Canopy Growth. The report said the combined market share of the 14 largest Canadian cultivators could exceed domestic market consumption by mid-2021, and international strategies are now critical as the Canadian market is small relative to global opportunities. Furthermore, oversupply in Canada would drive prices lower and accelerate consolidation

Cannabis websites in U.S. and Canada crash on 4/20

Some delivery websites, and the biggest legal delivery app, Eaze, crashed under the weight of demand on Saturday. Online cannabis dispensaries Nugg and Chill also suffered difficulties throughout the day. Eaze crashed repeatedly soon after it began “happy hour”, with free delivery in California, and a 20% discount on cannabis-related products in other states.

Gen Z Will Be the Ultimate Pot Consumers

America’s Generation Z is coming of age in a whole new world of weed. This large cohort, which already has big-time spending power as the oldest age into high school and college, is formulating its consumption habits at a time when marijuana muscles into the mainstream. Unlike their Gen X or Boomer parents, Gen Z shoppers have only known a time where cannabis is edging toward acceptance, with California voting to legalize medical use in 1996—a year before even the oldest Gen Z consumers were born.

“They’re growing up in a world where cannabis is completely normal,” said Anna Duckworth, co-founder and chief content officer of Miss Grass, an online cannabis accessories shop and publication based in Los Angeles. “Everybody will know how to roll a joint and there won’t be any shame talking about it.”

The Bauhaus of Blunts? Today’s most ambitious cannabis companies are high on design

To stand out in the crowd, cannabis companies are getting creative with their lifestyle branding.

Allowing for Marijuana Deliveries in All of California: A Q&A With NorCal Cannabis Company's AnnaRae Grabstein

AnnaRae Grabstein, Chief Compliance Officer of NorCal Cannabis Company talks about the recent lawsuit filed by 24 cities and one county in California against the state’s Bureau of Cannabis Control over banning cannabis deliveries and how this could impact the legal cannabis market.

I spent a day delivering weed in Los Angeles—here's what it was like and how much money you can make

To get an idea of what it’s really like to deliver weed, a CNBC writer spent a day with a driver from SpeedWeed, a delivery platform based in Los Angeles. SpeedWeed drivers work six-hour shifts — up to 30 hours per week — and earn $12 an hour. They also get paid $0.58 per mile driven and keep 100% of any tips they earn.

Best Dispensaries in Los Angeles: Where to Buy Legal Weed in LA - Thrillist

You need a guide to the best dispensaries in LA. This is that guide.

Tweed and TerraCycle team up to take Cannabis Packaging Recycling Program across Canada

First introduced in October 2018, the Tweed x TerraCycle Cannabis Packaging Recycling Program accepts all cannabis containers from all licensed producers - including tins, plastic bags, tubes, and bottles with child-proof caps, which are notoriously tricky to recycle. Since its debut, the free Cannabis Packaging Recycling Program has saved over 165,000 containers from ending up in landfills. The program is currently active in over 106 legal cannabis retail locations across Canada, including all Tweed and Tokyo Smoke stores, as well as select third-party retailers.

Canada Has Made Pot Super Boring

“Superbad” is about to have its own brand of weed! And they’re proud of being attached to a corporation. It sullies the whole experience, never mind the movie.

CBD

Vitamin Shoppe to sell edible CBD supplements as consumers clamor for cannabis compound

It’s one of the first major national retailers to sell CBD supplements since Congress legalized the cannabis derivative in December and flies in the face of the FDA’s guidance over the sale.

Deals

Canopy Growth to buy Acreage after federal legalization for $3.4B

Marijuana grower Canopy Growth announced a $3.4B deal to acquire Acreage Holdings after cannabis has been legalized in the U.S. Canopy co-CEO Bruce Linton says the combination of production and brands with Acreage’s U.S. licenses and management teams will generate value.

“Today we announce a complex transaction with a simple objective. Our right to acquire Acreage secures our entrance strategy into the United States as soon as a federally-permissible pathway exists, by combining Acreage’s management team, licenses and assets with Canopy Growth’s intellectual property and brands, there will be tremendous value creation for both companies’ shareholders.”

Acreage will receive an immediate aggregate total payment of $300M or ~$2.55 per Acreage Subordinate Voting Share (the “Up-Front Cash Premium”) based on the currently outstanding Subordinate Voting Shares of Acreage and conversion of certain convertible ‎securities. In addition, upon the exercise of the Right, holders of subordinate voting shares of Acreage (the “Acreage Subordinate Voting Shares”) will receive 0.5818 of a common share of Canopy Growth (the “Canopy Shares”) for each Acreage Subordinate Voting Share held (the “Exchange Ratio”) at the time of closing of the Transaction. Upon exercise of the Right, the total consideration payable pursuant to the Transaction is valued at approximately US$3.4B on a fully-diluted basis, represents a premium of 41.7% over the 30-day volume weighted average price of the Acreage Subordinate Voting Shares on the Canadian Securities Exchange (the “CSE”) ending April 16, 2019 (based on the Exchange Ratio, Up-Front Cash Premium and the 30-day volume weighted average price of Canopy Shares as at April 16, 2019).

According to the Arrangement, Acreage will be able to issue up to 58,000,000 Acreage Subordinate Voting Shares (implied valuation of $1.4B based on Canopy’s closing share price at the Exchange Ratio), together with a further 5,221,905 Acreage Subordinate Voting Shares in respect of certain potential acquisitions, which if the Right is exercised shall become future Canopy Shares, which, combined with an expectation of enhanced liquidity should further accelerate Acreage’s ability to fund organic and accretive rapid expansion.

Acreage Holders will hold approximately 12.1% ownership in Canopy Growth (on a pro forma basis) and up to 16.6% if permitted acquisitions are completed prior to the Trigger Event.

Acreage President, George Allen will depart the company effective immediately and Acreage Chairman and CEO Kevin Murphy will assume the duties of President.

TLDR: Canopy is buying the right to acquire Acreage once federal legalization happens, essentially providing Acreage with a high floor / lower (but very nice) ceiling and de-risk management having to worry about an exit.

Acreage acquires Deep Roots for $120M

Rightfully hidden behind the Canopy Growth/Acreage news, Acreage itself closed a relatively large deal, acquiring Deep Roots Medical LLC (“Deep Roots”), a vertically integrated cannabis operator in Nevada, for a total deal value of $120M to be paid in common units and cash. Deep Roots marks Acreage’s entry into Nevada, increasing the company’s total state footprint to 20 (including pending acquisitions) - the largest in the US cannabis industry by state count.

Pax Labs raises $420M at a $1.7B valuation

Pax Labs, the popular vape maker, confirmed the close of a $420M equity round, including from existing investors Tiger Global Management and Tao Capital Partners, and new investors including Prescott General Partners.

MedMen Enters Into Definitive Documentation for $250M Investment From Gotham Green Partners and Closes Initial Funding Tranche

“We are excited to close our investment into MedMen. The company has firmly established itself as the leading cannabis retailer in the United States with an unparalleled physical and brand footprint across the country,” said Jason Adler, managing member of Gotham Green Partners. “We look forward to working closely with management to accelerate growth and drive margin improvement across the organization.”

The Company intends to use the net proceeds from drawdowns on the Facility to fund the future capital needs of the business. In addition to funding general working capital, the growth capital will primarily be used to:

  • Operationalize existing retail licenses, with a focus on Florida, where the Company is licensed for 35 stores

  • Integrate assets acquired through pending transactions, including PharmaCann, LLC

  • Accelerate geographic expansion through bolt-on acquisitions and investments in core markets

  • Support the national roll-out of higher-margin in-house branded products

  • Continue to invest in technology and digital infrastructure, with a focus on delivery and loyalty programs

  • Consolidate the supply chain and enhance margins by ramping up cultivation and production capabilities

CannTrust $200M Public Offering

CannTrust Holdings announced that it has commenced a public offering of $200M common shares (85% by the Company, 15% by certain shareholders). The Company intends to use the net proceeds of the offering for general corporate purposes, including cultivation and facility expansion, expanded outdoor growing, international expansion, enhanced extraction capacity, upgrades for GMP Certification and biosynthesis development.

California Cannabis Distributor Nabis Raises Additional $4M

Nabis, one of California’s largest Type 11 Cannabis Distributors, announced they’ve raised $4M during their second round of financing which officially closed in March 2019. They previously raised $1.25M from Silicon Valley investors, bringing the total amount raised to $5.25M since its inception in 2017. Key investors include Y Combinator, Liquid 2 Ventures, Soma Capital, Babel Ventures, Paul Buchheit (creator of Gmail), Stanley Tang (co-founder of DoorDash), Clark Valberg (CEO of InVision) and Keisuke Honda (professional soccer player and coach).

Cannabis One Holdings Acquires Nevada-based Cultivation, Manufacturing, and Brand House, Evergreen Organix

Cannabis One will acquire Nevada State-issued cannabis cultivation & manufacturing licenses, held by NV 3480 Partners LLC and 3480 Hacienda Partners LLC and related infrastructure. They’ll also acquire the popular flower brand “Fleur” and the award-winning, cannabis-infused product brands, “Evergreen Organix” and “EG.O”, among others.