<< Back to All NewslettersSPAC-tacular
Cannabis is our little corner of the investing world, but sometimes developments from the broader world of finance seep in - like the enormous recent growth of Special Purpose Acquisition Companies (SPACs).
A SPAC is a publicly-traded pile of money paired, in principle, with a bankable management team which has a recognized track record of success that is actively looking to acquire another company, the proverbial “target.” The SPAC acquires the target - effectively taking the target public, and the SPAC management team is now at the helm to drive even more value creation - again, in principle.
Management gets up to 20% of the resulting company for their efforts if the target acquisition closes - a huge chunk of “sweat equity.” Investors get some protections, like the ability to sell their shares because the SPAC is public and to vote against the purchase of the target if they aren’t happy with the potential transaction. They also get some carrots, usually in the form of ½ warrants to purchase shares of the SPAC for $11.50 (SPAC IPO shares are usually sold for $10).
The scale and pace of investors’ SPAC enthusiasm is staggering, as the graphic below shows. Absolute dollars are impressive, but the relative numbers are even more so: SPACs made up 50% of total IPO volume in 2020, about three times more than the previous high of 17% they achieved in 2007.
Cannabis SPACs have also become significant players, hovering above the market with a significant amount of cash looking for targets, both cannabis companies, and hemp/ancillary companies. Some of these have announced transactions, such as Silver Spike’s SPAC purchasing Weedmaps, Subversive’s SPAC inking a deal with California distributor Caliva and Jay-Z's business empire to form a large California-focused business, and Ceres Acquisition Corporation agreeing to purchase Parallel, one of the few remaining large, private U.S. MSOs for $1.8 billion in total consideration. But, there are still seven other cannabis SPACs that have not yet announced any potential transactions but are holding a combined $1.6 billion in cash.
Why are SPACs targeting cannabis? One of the main reasons is purely practical: cannabis infrastructure is expensive to build, and the first few months of facility startup entail full-blown costs with no revenue as the first harvests are grown and turned into revenue. Canadian LPs were able to do very large capital raises in Canada in order to fund their expensive infrastructure buildouts while the cannabis market was hitting its initial crescendo. But, many investors now are more hesitant to fund large, expensive infrastructure projects given what happened with LPs overbuilding infrastructure. One of the only potential sources of checks big enough for cannabis projects in many companies' pipelines may be the SPACs.
As the image below shows, cannabis cultivation facility construction (in this case indoor), is not the most costly per square foot, but it is towards the upper end.
But, because many of the cannabis facilities that are going to be constructed in the next few years by U.S. MSOs are significantly larger than most other types of projects, the overall project cost can be much more expensive. The necessary capital to construct most of the permitted facilities in Illinois (up to 21 cultivation licenses, each with a limit of 210,000 canopy square feet which must generally be housed in a much larger building to accommodate work areas, drying, etc.), quickly becomes eye-watering. Unless you are Elon Musk building a Gigafactory to produce next-generation batteries, in which case a top-end cannabis facility is probably the cost of your breakroom.
Bengal Capital In the News:
- Is “Big Weed” here? Sanjay Tolia, Bengal Capital’s co-founder and managing partner, explains why “[t]he era of big cannabis is almost unavoidable, because of the regulatory complexities, and because the fixed costs of the business are so high,” in an article exploring the increased attention institutional investors are starting to give cannabis. (Observer)
- The real dislocation is in U.S. cannabis: Sanjay builds on last week’s Bengal Bite theme on why Canadian cannabis companies are disproportionately benefiting from American cannabis legalization news, and explores the current state of cannabis markets generally, in a video interview with the Green Market Report. (Green Market Report)
This Week's Bite:
- You feeling SPAC FOMO yet? This past week, another SPAC, Scooter Braun’s Ceres Acquisition Corporation, announced its merger with multi-state operator Parallel (formerly known as Surterra), making the founder, 4th-generation Wrigley-scion “Beau” Wrigley Jr. II, a billionaire once over. “At Wrigley, we brought joy to people’s lives. This is much bigger than that.” (Variety | Forbes)
- Flower focus: Flower, pre-rolls, and concentrates were some of the biggest winners following the boost in demand provided by the pandemic. While the retail price of smokable adult-use marijuana products rose in California, Colorado, Nevada, and Washington state, the retail price of other product categories was a mixed bag depending on the market. (Marijuana Business Daily)
- Demand Is Booming For Delta-8: A cannabinoid that we highlighted in a previous Bite, Delta-8, is experiencing increasing demand according to the January 2021 Hemp Benchmarks report. This cannabinoid, while lightly psychoactive, is not derived from hemp plant material but synthesized from extracted CBD. This is helping drive sales of crude CBD oil, CBD Isolate, and some wholesale CBD products. Despite the fact that trading volumes of delta-8 THC remain a small proportion of those for CBD products, it is the fastest-growing product in the hemp sector as of the January report. (Green Market Report)
Publication Sources:
Scalisi, Tom. “2020 Guide to US Building Commercial Construction Cost per Square Foot.” Levelset, 12 Nov. 2020, www.levelset.com/blog/commercial-construction-cost-per-square-foot/.
Siegal, Jacob, and Maren Estrada. “11 Mindblowing Facts about Tesla's Gigafactory.” BGR, 22 Nov. 2019, bgr.com/2016/08/08/tesla-gigafactory-size-cost-elon-musk.
“What Is an Average Commercial Building Cost per Square Foot?” Steel Buildings | America, BuildingsGuide.com Online Inc, 17 Feb. 2021, www.buildingsguide.com/faq/what-average-commercial-building-cost-square-foot/.
The Canadians Aren't Coming
In August 1814, during the War of 1812, an army of Canadians, then still British, marched into Washington D.C. with a force of 4,500 men and burned the White House, U.S. Capitol, and many other public buildings. In 2020, many cannabis analysts, who tend to be Canadian because the Canadian investment banks remain the key players in cannabis financings, and investors, who tend to at least sometimes listen to analysts, seem to be expecting another invasion as soon as there is any kind of U.S. federal easing of restrictions on cannabis – that of major LPs flooding over the border taking meaningful share in the U.S. THC markets. This belief is possibly the biggest disconnect in cannabis between analysts/investors and those actually leading U.S. multi-state operators (MSOs) – a serious possibility, or even certainty, that must be priced into an LP’s stock according to some analysts and investors, and regarded as an utter farce almost unanimously by MSO executives in private.