CSAC: The Largest Cannabis IPO with a SPAC Discount
February 7th, 2019
Exclusive, News, Top Story
Cannabis Strategies Acquisition Corp. (NEO: CSA) is poised to become one of the largest cannabis companies in the world. After raising C$135 million from investors, the special purpose acquisition company (SPAC) executed agreements to acquire five cannabis companies for its anchor portfolio. These geographically-diverse companies are projected to collectively generate C$260 in revenue and C$140 in adjusted EBITDA this year.
The company trades with a C$390 million equity market capitalization (based on 26m shares expected once the acquisitions close, which excludes impact from any warrants issued by CSA), which translates to a 3.5X 2019 adjusted EBITDA multiple—a significant discount to the more than 20X EBITDA multiple assigned to many industry peers. The valuation discount could close when it becomes a publicly-traded company, as more investors have an opportunity to buy the stock and tangible revenues appear in its SEDAR filings.
Cannabis Strategies Acquisition will become one of the largest cannabis companies in the world with an estimated C$260 million in revenue and C$140 million in adjusted EBTIDA this year across its portfolio. With over 325 employees, three cultivation facilities, and eight dispensaries, the company’s management team expects to produce over 31,000 kilograms of finished flower and 3,100,000 grams annually by next year.
|Selected 2018 – 2019 Targeted Consolidated Financials (in millions, C$)|
|Target Revenue||Target Adjusted EBITDA|
|Washoe||10 – 15||30 – 40||5 – 6||15 – 20|
|LivFree||40 – 45||50 – 60||10 – 13||20 – 30|
|Canopy||15 – 20||20 – 25||5 – 6||6 – 10|
|Sira||15 – 20||100 – 120||4 – 5||60 – 70|
|CannaPunch||7 – 10||20 – 25||4 – 5||10 – 15|
|Pro Forma Target Portfolio Combined||95 – 105||240 – 260||30 – 35||130 – 140|
In addition to the operational footprint, these acquisitions have created an exceptional management team led by CEO Jon Sandelman, Vice Chairman Mark Smith and COO Jennifer Drake. The team combines strong financial, strategy and management experience with proven world-class cannabis operations in the anchor portfolio, including successful up-and-running dispensaries and cultivation facilities, a line of premier edible brands, and leading manufacturing capabilities across the Western United States and in Massachusetts.
The company plans to expand into new markets and build its footprint in existing markets with limited licenses, while adding innovative new products to its brand portfolio. In particular, the management team is focused on companies that add material EBITDA within 12 months, especially when enhanced access to capital is required to meet that potential. Many portfolio companies have also accepted equity consideration in a vote of confidence.
Cannabis Strategies Acquisition plans to de-SPAC and become a publicly-traded company during the first quarter of this year. When this happens, the company could see a significant improvement in its valuation relative to its peers since the acquisitions will be finalized and more investors will be able to purchase its stock. Investors in the meantime have an opportunity to acquire the stock ahead of the de-SPAC on the NEO exchange.
At the same time, the company could rapidly scale up its presence by acquiring companies clustered in states around its anchor portfolio in the Eastern and Western United States. These acquisitions could further accelerate revenue and EBITDA growth moving forward and help create one of the largest cannabis companies in the world—and importantly, one of the only large cannabis brands located in the United States market.
Many institutional investors and public companies interested in exposure to the cannabis industry could also be interested in a large player in the space. For example, Canopy Growth Corp. (NYSE: CGC) (TSX: WEED) became the preferred partner for Constellation Brands Inc. (NYSE: STZ) when it was looking for exposure to cannabis. The U.S. market has been a little more challenging due to federal laws, but larger firms could have a long-term advantage.
Cannabis Strategies Acquisition Corp. (NEO: CSA) represents a unique opportunity to capitalize on growing demand for cannabis investments in the U.S. With plans to de-SPAC during the first quarter, investors could see a significant convergence in its valuation relative to other cannabis companies in the space. Investors may want to take a look at the restricted stock on the NEO exchange ahead of the de-SPAC for these reasons.
For more information, download their prospectus filings and investor presentations from SEDAR.
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